This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning our ability to:
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHEWY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
|
| | | | | | | |
| As of |
| May 5, 2019 | | February 3, 2019 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 29,298 |
| | $ | 88,331 |
|
Accounts receivable | 58,984 |
| | 48,738 |
|
Inventories | 254,140 |
| | 220,855 |
|
Due from Parent, net | 74,655 |
| | 78,712 |
|
Prepaid expenses and other current assets | 13,048 |
| | 11,949 |
|
Total current assets | 430,125 |
| | 448,585 |
|
Property and equipment, net | 93,544 |
| | 91,691 |
|
Operating lease right-of-use assets | 157,139 |
| | — |
|
Other non-current assets | 1,505 |
| | 1,346 |
|
Total assets | $ | 682,313 |
| | $ | 541,622 |
|
Liabilities and stockholders’ deficit | | | |
Current liabilities: | | | |
Trade accounts payable | $ | 519,597 |
| | $ | 502,880 |
|
Accrued expenses and other current liabilities | 309,054 |
| | 311,150 |
|
Total current liabilities | 828,651 |
| | 814,030 |
|
Operating lease liabilities | 177,636 |
| | — |
|
Other long-term liabilities | 33,967 |
| | 63,534 |
|
Total liabilities | 1,040,254 |
| | 877,564 |
|
Commitments and contingencies (Note 4) |
| |
|
Stockholders’ deficit: | | | |
Voting common stock, $0.01 par value per share, 1,000 shares authorized, 100 shares issued and outstanding as of May 5, 2019 and February 3, 2019 | — |
| | — |
|
Additional paid-in capital | 1,263,715 |
| | 1,256,160 |
|
Accumulated deficit | (1,621,656 | ) | | (1,592,102 | ) |
Total stockholders’ deficit | (357,941 | ) | | (335,942 | ) |
Total liabilities and stockholders’ deficit | $ | 682,313 |
| | $ | 541,622 |
|
CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)
| | | | | | | | | | | |
| As of |
| July 31, 2022 | | January 30, 2022 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 606,800 | | | $ | 603,079 | |
Accounts receivable | 143,805 | | | 123,510 | |
Inventories | 707,921 | | | 560,430 | |
Prepaid expenses and other current assets | 46,902 | | | 36,513 | |
Total current assets | 1,505,428 | | | 1,323,532 | |
Property and equipment, net | 431,554 | | | 367,166 | |
Operating lease right-of-use assets | 411,231 | | | 372,693 | |
Other non-current assets | 20,300 | | | 22,890 | |
Total assets | $ | 2,368,513 | | | $ | 2,086,281 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Trade accounts payable | $ | 1,049,390 | | | $ | 883,316 | |
Accrued expenses and other current liabilities | 728,916 | | | 761,563 | |
Total current liabilities | 1,778,306 | | | 1,644,879 | |
Operating lease liabilities | 456,701 | | | 410,168 | |
Other long-term liabilities | 16,115 | | | 16,498 | |
Total liabilities | 2,251,122 | | | 2,071,545 | |
Commitments and contingencies (Note 4) | 0 | | 0 |
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of July 31, 2022 and January 30, 2022 | — | | | — | |
Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 111,458,932 and 108,918,032 shares issued and outstanding as of July 31, 2022 and January 30, 2022, respectively | 1,114 | | | 1,089 | |
Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 311,188,356 shares issued and outstanding as of July 31, 2022 and January 30, 2022 | 3,112 | | | 3,112 | |
Additional paid-in capital | 2,083,123 | | | 2,021,310 | |
Accumulated deficit | (1,969,958) | | | (2,010,775) | |
Total stockholders’ equity | 117,391 | | | 14,736 | |
Total liabilities and stockholders’ equity | $ | 2,368,513 | | | $ | 2,086,281 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CHEWY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
|
| | | | | | | |
| 13 Weeks Ended |
| May 5, 2019 | | April 29, 2018 |
Net sales | $ | 1,108,872 |
| | $ | 763,462 |
|
Cost of goods sold | 854,982 |
| | 613,474 |
|
Gross profit | 253,890 |
| | 149,988 |
|
Operating expenses: | | | |
Selling, general and administrative | 181,897 |
| | 123,152 |
|
Advertising and marketing | 102,263 |
| | 86,661 |
|
Total operating expenses | 284,160 |
| | 209,813 |
|
Loss from operations | (30,270 | ) | | (59,825 | ) |
Interest income, net | 716 |
| | 10 |
|
Loss before income tax provision | (29,554 | ) | | (59,815 | ) |
Income tax provision | — |
| | — |
|
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) |
| | | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.08 | ) | | $ | (0.15 | ) |
Weighted average common shares used in computing net loss per share attributable to common stockholders, basic and diluted | 393,000 |
| | 393,000 |
|
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 |
Net sales | $ | 2,431,011 | | | $ | 2,155,036 | | | $ | 4,859,338 | | | $ | 4,290,214 | |
Cost of goods sold | 1,748,214 | | | 1,561,582 | | | 3,508,721 | | | 3,106,984 | |
Gross profit | 682,797 | | | 593,454 | | | 1,350,617 | | | 1,183,230 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 516,983 | | | 437,672 | | | 1,021,266 | | | 843,892 | |
Advertising and marketing | 144,159 | | | 171,968 | | | 288,880 | | | 316,403 | |
Total operating expenses | 661,142 | | | 609,640 | | | 1,310,146 | | | 1,160,295 | |
Income (loss) from operations | 21,655 | | | (16,186) | | | 40,471 | | | 22,935 | |
Interest income (expense), net | 690 | | | (500) | | | 346 | | | (902) | |
Income (loss) before income tax provision | 22,345 | | | (16,686) | | | 40,817 | | | 22,033 | |
Income tax provision | — | | | — | | | — | | | — | |
Net income (loss) | $ | 22,345 | | | $ | (16,686) | | | $ | 40,817 | | | $ | 22,033 | |
| | | | | | | |
Earnings (loss) per share attributable to common Class A and Class B stockholders: | | | | | | | |
Basic | $ | 0.05 | | | $ | (0.04) | | | $ | 0.10 | | | $ | 0.05 | |
Diluted | $ | 0.05 | | | $ | (0.04) | | | $ | 0.10 | | | $ | 0.05 | |
Weighted-average common shares used in computing earnings per share: | | | | | | | |
Basic | 421,690 | | | 416,665 | | | 421,048 | | | 415,957 | |
Diluted | 426,833 | | | 416,665 | | | 426,772 | | | 427,458 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CHEWY, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) (Unaudited)
|
| | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended May 5, 2019 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders' Deficit |
| Shares | | Amount | | | |
Balance as of February 3, 2019 | — |
| | $ | — |
| | $ | 1,256,160 |
| | $ | (1,592,102 | ) | | $ | (335,942 | ) |
Share-based compensation expense | — |
| | — |
| | 7,230 |
| | — |
| | 7,230 |
|
Contribution from Parent | — |
| | — |
| | 325 |
| | — |
| | 325 |
|
Net loss | — |
| | — |
| | — |
| | (29,554 | ) | | (29,554 | ) |
Balance as of May 5, 2019 | — |
| | $ | — |
| | $ | 1,263,715 |
| | $ | (1,621,656 | ) | | $ | (357,941 | ) |
| | | | | | | | | |
| 13 Weeks Ended April 29, 2018 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders' Deficit |
| Shares | | Amount | | | |
Balance as of January 28, 2018 | — |
| | $ | — |
| | $ | 1,240,509 |
| | $ | (1,324,212 | ) | | $ | (83,703 | ) |
Share-based compensation expense | — |
| | — |
| | 3,273 |
| | — |
| | 3,273 |
|
Contribution from Parent | — |
| | — |
| | 325 |
| | — |
| | 325 |
|
Net loss | — |
| | — |
| | — |
| | (59,815 | ) | | (59,815 | ) |
Balance as of April 29, 2018 | — |
| | $ | — |
| | $ | 1,244,107 |
| | $ | (1,384,027 | ) | | $ | (139,920 | ) |
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended July 31, 2022 |
| Class A and Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balance as of May 1, 2022 | 420,606 | | | $ | 4,206 | | | $ | 2,046,707 | | | $ | (1,992,303) | | | $ | 58,610 | |
| | | | | | | | | |
Share-based compensation expense | — | | | — | | | 38,377 | | | — | | | 38,377 | |
Vesting of share-based compensation awards | 1,948 | | | 19 | | | (19) | | | — | | | — | |
Distribution to parent | 93 | | | 1 | | | (1) | | | — | | | — | |
Tax withholdings for share-based compensation awards | — | | | — | | | (4) | | | — | | | (4) | |
Tax sharing agreement with related parties | — | | | — | | | (1,937) | | | — | | | (1,937) | |
Net income | — | | | — | | | — | | | 22,345 | | | 22,345 | |
Balance as of July 31, 2022 | 422,647 | | | $ | 4,226 | | | $ | 2,083,123 | | | $ | (1,969,958) | | | $ | 117,391 | |
| | | | | | | | | |
| 13 Weeks Ended August 1, 2021 |
| Class A and Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balance as of May 2, 2021 | 415,395 | | | $ | 4,154 | | | $ | 1,963,107 | | | $ | (1,898,239) | | | $ | 69,022 | |
| | | | | | | | | |
Share-based compensation expense | — | | | — | | | 21,778 | | | — | | | 21,778 | |
Vesting of share-based compensation awards | 2,274 | | | 23 | | | (23) | | | — | | | — | |
Distribution to parent | 93 | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | |
Tax sharing agreement with related parties | — | | | — | | | 939 | | | — | | | 939 | |
Net loss | — | | | — | | | — | | | (16,686) | | | (16,686) | |
Balance as of August 1, 2021 | 417,762 | | | $ | 4,178 | | | $ | 1,985,800 | | | $ | (1,914,925) | | | $ | 75,053 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CHEWY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
|
| | | | | | | |
| 13 Weeks Ended |
| May 5, 2019 | | April 29, 2018 |
Cash flows from operating activities | | | |
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 6,949 |
| | 4,718 |
|
Share-based compensation expense | 7,230 |
| | 3,273 |
|
Non-cash lease expense | 4,012 |
| | — |
|
Amortization of deferred rent | — |
| | 2,200 |
|
Other | 1,820 |
| | 7 |
|
Net change in operating assets and liabilities: | | | |
Accounts receivable | (10,246 | ) | | 4,255 |
|
Inventories | (33,285 | ) | | (32,543 | ) |
Prepaid expenses and other current assets | (3,090 | ) | | 828 |
|
Other non-current assets | (159 | ) | | 487 |
|
Trade accounts payable | 16,716 |
| | 34,317 |
|
Accrued expenses and other current liabilities | (11,190 | ) | | (4,758 | ) |
Operating lease liabilities | (2,121 | ) | | — |
|
Other long-term liabilities | 1,777 |
| | 1,758 |
|
Net cash used in operating activities | (51,141 | ) | | (45,273 | ) |
Cash flows from investing activities | | | |
Capital expenditures | (12,222 | ) | | (13,461 | ) |
Cash advances provided to Parent | (11,493 | ) | | (115 | ) |
Cash reimbursements of advances provided to Parent | 15,550 |
| | 10,090 |
|
Net cash used in investing activities | (8,165 | ) | | (3,486 | ) |
Cash flows from financing activities | | | |
Contribution from Parent | 325 |
| | 325 |
|
Principal repayments of finance lease obligations | (52 | ) | | — |
|
Net cash provided by financing activities | 273 |
| | 325 |
|
Net decrease in cash and cash equivalents | (59,033 | ) | | (48,434 | ) |
Cash and cash equivalents, as of beginning of period | 88,331 |
| | 68,767 |
|
Cash and cash equivalents, as of end of period | $ | 29,298 |
| | $ | 20,333 |
|
| | | |
Supplemental disclosures of non-cash investing and financing activities: | | | |
Capital expenditures included in accrued expenses and other current liabilities | $ | 2,041 |
| | $ | 6,589 |
|
Leasehold improvements paid by tenant allowances | $ | 758 |
| | $ | 110 |
|
Assets acquired in exchange for new operating lease liabilities | $ | 165 |
| | $ | — |
|
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| 26 Weeks Ended July 31, 2022 |
| Class A and Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amount | | | |
Balance as of January 30, 2022 | 420,106 | | | $ | 4,201 | | | $ | 2,021,310 | | | $ | (2,010,775) | | | $ | 14,736 | |
| | | | | | | | | |
Share-based compensation expense | — | | | — | | | 64,171 | | | — | | | 64,171 | |
Vesting of share-based compensation awards | 2,501 | | | 25 | | | (25) | | | — | | | — | |
Tax withholdings for share-based compensation awards | (53) | | | (1) | | | (2,471) | | | — | | | (2,472) | |
Distribution to parent | 93 | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | |
Tax sharing agreement with related parties | — | | | — | | | 139 | | | — | | | 139 | |
Net income | — | | | — | | | — | | | 40,817 | | | 40,817 | |
Balance as of July 31, 2022 | 422,647 | | | $ | 4,226 | | | $ | 2,083,123 | | | $ | (1,969,958) | | | $ | 117,391 | |
| | | | | | | | | |
| 26 Weeks Ended August 1, 2021 |
| Class A and Class B Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | |
Balance as of January 31, 2021 | 415,046 | | | $ | 4,150 | | | $ | 1,930,804 | | | $ | (1,936,958) | | | $ | (2,004) | |
| | | | | | | | | |
| | | | | | | | | |
Share-based compensation expense | — | | | — | | | 44,884 | | | — | | | 44,884 | |
Vesting of share-based compensation awards | 2,623 | | | 27 | | | (27) | | | — | | | — | |
Distribution to parent | 93 | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | |
Tax sharing agreement with related parties | — | | | — | | | 10,140 | | | — | | | 10,140 | |
| | | | | | | | | |
Net income | — | | | — | | | — | | | 22,033 | | | 22,033 | |
Balance as of August 1, 2021 | 417,762 | | | $ | 4,178 | | | $ | 1,985,800 | | | $ | (1,914,925) | | | $ | 75,053 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | | | | | | | | | |
| 26 Weeks Ended |
| July 31, 2022 | | August 1, 2021 |
Cash flows from operating activities | | | |
Net income | $ | 40,817 | | | $ | 22,033 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 37,678 | | | 24,117 | |
Share-based compensation expense | 64,171 | | | 44,884 | |
Non-cash lease expense | 19,203 | | | 16,399 | |
Other | 604 | | | 179 | |
Net change in operating assets and liabilities: | | | |
Accounts receivable | (20,295) | | | (12,734) | |
Inventories | (147,491) | | | 7,326 | |
Prepaid expenses and other current assets | (13,861) | | | (31,695) | |
Other non-current assets | 2,067 | | | (3,324) | |
Trade accounts payable | 166,074 | | | 50,656 | |
Accrued expenses and other current liabilities | (7,343) | | | 78,233 | |
Operating lease liabilities | (9,592) | | | (10,562) | |
Other long-term liabilities | (427) | | | (2,061) | |
Net cash provided by operating activities | 131,605 | | | 183,451 | |
Cash flows from investing activities | | | |
Capital expenditures | (124,212) | | | (63,714) | |
| | | |
Other | (1,400) | | | — | |
Net cash used in investing activities | (125,612) | | | (63,714) | |
Cash flows from financing activities | | | |
| | | |
| | | |
Payments for tax withholdings related to vesting of share-based compensation awards | (2,472) | | | — | |
Proceeds from tax sharing agreement with related parties | 533 | | | 42,405 | |
| | | |
| | | |
Principal repayments of finance lease obligations | (333) | | | (490) | |
Net cash (used in) provided by financing activities | (2,272) | | | 41,915 | |
Net increase in cash and cash equivalents | 3,721 | | | 161,652 | |
Cash and cash equivalents, as of beginning of period | 603,079 | | | 563,345 | |
Cash and cash equivalents, as of end of period | $ | 606,800 | | | $ | 724,997 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1. | Description of Business and Basis of Presentation |
1.Description of Business
Chewy, Inc. and its wholly-owned subsidiaries (collectively “Chewy” or the “Company”) is a pure play e-commerce business geared toward pet products and services for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy serves its customers through its retail website, www.chewy.com, and its mobile applications and focuses on delivering exceptional customer service, competitive prices, outstanding convenience (including Chewy’s Autoship subscription program, fast shipping, and hassle-free returns), and a large selection of high-quality pet food, treats and supplies, price, convenience (including Chewy’s Autoship subscription program), fast shipping, and hassle-free returns.pet healthcare products.
PetSmart Acquisition
On May 31, 2017, theThe Company was acquired by PetSmart, Inc. (“PetSmart” or the “Parent”), a leading specialty provider of products, services and solutions for the lifetime needs of pets. This change-in-control event is referred to as the “PetSmart Acquisition”. PetSmart is wholly-ownedcontrolled by a consortium including private investment funds advised by BC Partners and its affiliates, La Caisse de dépôt et placement du Québec, affiliates of GIC Special Investments Pte Ltd, affiliates of StepStone Group LP, and funds advised by Longview Asset Management, LLC (collectively, the “Sponsors”), and. The Company was controlled by affiliatesPetSmart LLC (“PetSmart”), a wholly-owned subsidiary of BC Partners.the Sponsors through February 11, 2021.
Initial Public Offering
On June 18, 2019, the Company closed its initial public offering (“IPO”), in which it issued and sold 5.6 million shares of its Class A common stock. The price at IPO was $22.00 per share. The Company received net proceedsis transitioning corporate functions from Dania Beach, Florida to Plantation, Florida, which will serve as the new co-headquarters beginning August 22, 2022.
2. Basis of approximately $111.5 million from the IPO after deducting underwriting discountsPresentation and commissions of $6.2 million and offering expenses.Significant Accounting Policies
Prior to the completion of the IPO, the Company amended and restated its certificate of incorporation to authorize Class A and Class B common stock and reclassify the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock. In connection with the IPO, 47,875,000 shares of the Company’s Class B common stock were reclassified into shares of Class A common stock on a one-to-one basis. As of June 18, 2019, 53,475,000 shares of the Company’s Class A common stock and 345,125,000 shares of Class B common stock were outstanding. The Class A common stock outstanding includes the shares issued in the IPO.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related notes include the accounts of Chewy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements and notes thereto of Chewy, Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”) accounting standards codification. In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the quarterly period ended May 5, 2019July 31, 2022 are not necessarily indicative of the results for the entire fiscal year. The unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2019July 31, 2022 (“10-Q Report”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s final prospectus filed withAnnual Report on Form 10-K for the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 17, 2019 (the “Prospectus”fiscal year ended January 30, 2022 (“10-K Report”).
Fiscal Year
The Company has a 5252- or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. EachThe Company’s 2022 fiscal year generally consists of four 13-weekends on January 29, 2023 and is a 52-week year. The Company’s 2021 fiscal quarters, with each fiscal quarter ending on the Sunday that is closest to the last day of the last month of the quarter.year ended January 30, 2022 and was a 52-week year.
Significant Accounting Policies
| |
2. | Summary of Significant Accounting Policies |
Other than policies noted within Recent Accounting Pronouncements below,herein, there have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the Prospectus.10-K Report.
Use of Estimates
GAAP requires management to make certain estimates, judgments, and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments. Actual results could differ from those estimates.
Key estimates relate primarily to determining the net realizable value and demand for inventory, useful lives associated with property and equipment and intangible assets, valuation allowances with respect to deferred tax assets, contingencies, self-insurance accruals, evaluation of sales tax positions, and the valuation and assumptions underlying share-based compensation. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Recent Accounting PronouncementsAccrued Expenses and Other Current Liabilities
Recently Adopted Accounting Pronouncements
ASU 2016-02, Leases. In February 2016, the FASB issued this Accounting Standards Update (“ASU”) to provide a comprehensive lease accounting model that requires lessees to recognize lease liabilities and corresponding right-of-use assets for most leases. The new guidance also changes the definition of a lease and requires enhanced disclosures of pertinent quantitative and qualitative information about an entity’s leasing activities. The FASB subsequently issued ASU 2018-10 allowing entities to initially apply ASU 2016-02 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. These ASUs became effective at the beginning of the Company’s 2019 fiscal year. The Company adopted this ASU by applying the new guidance to new and existing leases effective February 4, 2019, with no restatement of comparative periods. The Company elected the package of practical expedients, which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also made an accounting policy election to not recognize right-of-use assets and lease liabilities arising from short-term leases on its condensed consolidated balance sheets. The adoption of this ASU did not result in a cumulative effect adjustment to accumulated deficit. Upon adoption, the Company recognized operating lease right-of-use assets of $162.8 million and operating lease liabilities of $193.6 million. The adoption of this new guidance did not have a material net impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows.
The Company has operating and finance lease agreements for its fulfillment and customer service centers, corporate offices, and certain equipment. The Company determines if an arrangement contains a lease at inception based on the ability to control a physically distinct asset. Operating and finance lease right-of-use assets are recorded in the condensed consolidated balance sheets based on the initial measurement of the lease liability as adjusted to include prepaid rent and initial direct costs less any lease incentives received. Lease liabilities are measured at the commencement date based on the present value of the lease payments over the lease term. Lease payments are generally fixed but may include provisions for future rent increases based on a market index. The Company separately accounts for lease and non-lease components within lease agreements; the non-lease components primarily relate to common area maintenance for real estate leases. The Company uses its incremental borrowing rate to present value the lease liability as key inputs to determine the interest rate implicit in the lease are not shared by lessors.
Operating lease expense is recorded on a straight-line basis over the lease term. Right-of-use assets and lease liabilities for short-term leases are not recognized in the condensed consolidated balance sheets. Payments for short-term leases are recognized in the condensed consolidated statements of operations on a straight-line basis over the lease term.
ASU 2018-07, Stock Compensation; Improvements to Nonemployee Share-Based Payment Accounting. In June 2018, the FASB issued this ASU to expand the scope of Topic 718, Compensation-Stock Compensation to include share-based payment awards to be issued to non-employees in exchange for acquiring goods and services. The ASU aligned the accounting for awards issued to non-employees to be similar to employee awards. This update became effective at the beginning of the Company’s 2019 fiscal year. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.
Recently Issued Accounting Pronouncements
ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. In August 2018, the FASB issued this ASU to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective at the beginning of the Company’s 2020 fiscal year. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated financial statements and disclosures.
| |
3. | Accrued Expenses and Other Current Liabilities |
The following table presents the components of accrued expenses and other current liabilities (in thousands):
| | | | | | | | | | | |
| As of |
| July 31, 2022 | | January 30, 2022 |
Outbound fulfillment | $ | 378,958 | | | $ | 389,548 | |
Advertising and marketing | 84,333 | | | 86,285 | |
Payroll liabilities | 72,150 | | | 70,556 | |
Accrued expenses and other | 193,475 | | | 215,174 | |
Total accrued expenses and other current liabilities | $ | 728,916 | | | $ | 761,563 | |
Fair Value of Financial Instruments
|
| | | | | | | |
| As of |
| May 5, 2019 | | February 3, 2019 |
Outbound fulfillment | $ | 143,620 |
| | $ | 147,610 |
|
Advertising and marketing | 68,006 |
| | 85,421 |
|
Accrued expenses and other | 97,428 |
| | 78,119 |
|
Total accrued expenses and other current liabilities | $ | 309,054 |
| | $ | 311,150 |
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
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4. | Commitments and Contingencies
|
As of May 5, 2019, there were no material changes toLevel 1-Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2-Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3-Valuations based on unobservable inputs reflecting the Company’s advertisingassumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value and services purchase commitments and legal matters disclosed in Note 5are classified within Level 1 of the “Notes to Consolidated Financial Statements” included in the Prospectus.fair value hierarchy because they are valued using quoted market prices.
Interest Income and Expense
The following table provides information aboutis a summary of cash and cash equivalents (in thousands):
| | | | | | | | | | | |
| As of |
| July 31, 2022 | | January 30, 2022 |
Cash | $ | 414,839 | | | $ | 401,119 | |
Level 1 securities: | | | |
Money market funds | 127,000 | | | 67,000 | |
Commercial paper | 64,961 | | | 74,965 | |
U.S. Treasury securities | — | | | 59,995 | |
| | | |
Cash and cash equivalents | $ | 606,800 | | | $ | 603,079 | |
Stockholders’ Equity
Conversion of Class B Common Stock
On April 12, 2021, Argos Intermediate Holdco I Inc. (“Argos Holdco”), which is controlled by affiliates of BC Partners, converted 6,150,000 shares of the Company’s interest income (expense),Class B common stock into Class A common stock and sold such Class A common stock.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. In June 2022, the FASB issued this Accounting Standards Update (“ASU”) to clarify the guidance when measuring the fair value of an equity security subject to contractual sale restrictions that prohibit the sale of an equity security. This update is effective at the beginning of the Company’s 2024 fiscal year, with early adoption permitted. The Company does not believe the adoption of this standard will have a material impact on the Company’s condensed consolidated financial statements.
3. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):
| | | | | | | | | | | |
| As of |
| July 31, 2022 | | January 30, 2022 |
Furniture, fixtures and equipment | $ | 197,069 | | | $ | 132,727 | |
Computer equipment | 60,740 | | | 55,164 | |
Internal-use software | 112,316 | | | 95,302 | |
Leasehold improvements | 163,742 | | | 153,797 | |
Construction in progress | 86,391 | | | 85,043 | |
| 620,258 | | | 522,033 | |
Less: accumulated depreciation and amortization | 188,704 | | | 154,867 | |
Property and equipment, net | $ | 431,554 | | | $ | 367,166 | |
Internal-use software includes labor and license costs associated with software development for internal use. As of July 31, 2022 and January 30, 2022, the Company had accumulated amortization related to internal-use software of $44.0 million and $35.1 million, respectively.
Construction in progress is stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
For the thirteen weeks ended July 31, 2022 and August 1, 2021, the Company recorded depreciation expense on property and equipment of $13.9 million, and $9.4 million, respectively, and amortization expense related to internal-use software costs of $5.5 million, and $3.3 million, respectively. For the twenty-six weeks ended July 31, 2022 and August 1, 2021, the Company recorded depreciation expense on property and equipment of $26.0 million, and $18.0 million, respectively, and amortization expense related to internal-use software costs of $9.9 million, and $6.1 million, respectively.The aforementioned depreciation and amortization expenses were included within selling, general and administrative expenses in the condensed consolidated statements of operations.
4. Commitments and Contingencies
Legal Matters
Various legal claims arise from time to time in the normal course of business. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which it is presently a party will have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
|
| | | | | | | |
| 13 Weeks Ended |
| May 5, 2019 | | April 29, 2018 |
Interest income | $ | 720 |
| | $ | 10 |
|
Interest expense | (4 | ) | | — |
|
| $ | 716 |
| | $ | 10 |
|
International Business Machines Corporation (“IBM”) previously alleged that the Company is infringing 4 of its patents. On February 15, 2021, the Company filed a declaratory judgment action in the United States District Court for the Southern District of New York (the “District Court”) against IBM seeking the District Court’s declaration that the Company is not infringing the 4 asserted IBM patents. On April 19, 2021, IBM filed an answer with counterclaims, alleging that the Company is infringing the 4 patents by operation of the Chewy.com website and mobile application, and seeking unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. The Company filed a motion to dismiss IBM’s claims against 3 of the asserted patents on May 14, 2021. In response, IBM filed an amended complaint on May 24, 2021 that included an additional assertion that the Company is infringing a fifth IBM patent. On October 8, 2021, the parties had a claim construction hearing and on November 9, 2021, the claim construction rulings resulted in 1 of the 5 patents being eliminated from the case. The parties filed their motions for summary judgment which were fully briefed on February 24, 2022. A pre-trial conference was held on March 25, 2022, where the judge heard oral arguments on the motions for summary judgment. On April 11, 2022, the District Court granted the Company’s motions for summary judgment that the Company did not infringe 3 of the patents and that the fourth patent is invalid. On April 29, 2022, IBM filed a notice of appeal in the United States Court of Appeals for the Federal Circuit to appeal the District Court’s judgment and filed its appellate brief on August 18, 2022. The Company continues to deny the allegations of any infringement and intends to vigorously defend itself in this matter.
5. Debt
ABL Credit Facility
On June 18, 2019, theThe Company entered intohas a new five-year senior secured asset-backedasset-based credit facility (the “ABL Credit Facility”) which matures in August 2026 and provides for non-amortizing revolving loans in an aggregate principal amount of up to $300$500 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $100$300 million,, subject to customary conditions.
Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, either a base rate or a LIBOR rate. The applicable margin is generally determined based on the average excess liquidity during the immediately preceding fiscal quarter as a percentage of the maximum borrowing amount under the ABL Credit Facility, and is between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. The Company is also required to pay a pay commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility.
All obligations Based on the Company’s borrowing base as of July 31, 2022, which is reduced by standby letters of credit, the Company had $449.9 million of borrowing capacity under the ABL Credit Facility are guaranteed on a senior secured first-lien basis byFacility. As of July 31, 2022, the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions, and secured, subject to permitted liens and other exceptions, by a perfected first-priority security interest in substantially all of the Company’s and its wholly-owned domestic subsidiaries’ assets.
The ABL Credit Facility contains a number of covenants that, among other things, restrict the Company’s and its restricted subsidiaries’ ability to:
•incur or guarantee additional debt and issue certain equity securities;
•make certain investments and acquisitions;
•make certain restricted payments and payments of certain indebtedness;
•incur certain liens or permit them to exist;
•enter into certain types of transactions with affiliates;
•merge or consolidate with another company; and
•transfer, sell or otherwise dispose of assets.
Each of these restrictions is subject to various exceptions.
In addition,Company had no outstanding borrowings under the ABL Credit Facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the facility is less than the greater of 10% of the maximum borrowing amount and $30.0 million for a certain period of time. The ABL Credit Facility also contains certain customary affirmative covenants and events of default for facilities of this type, including an event of default upon a change in control.Facility.
The Company leases all of its fulfillment and customer service centers and corporate offices under non-cancelable operating lease agreements. The terms of the Company’s real estate leases generally range from 5 to 15 years and typically allow for the leases to be renewed for up to three3 additional five-year terms. Fulfillment and customer service centers and corporate office leases including exercised renewal options, expire at various dates through 2031.2034, excluding renewal options. The Company also leases certain equipment under operating and finance leases. The terms of equipment leases generally range from 3 to 5 years and do not contain renewal options. These leases expire at various dates through 2024.2025.
The Company’s finance leases as of May 5, 2019July 31, 2022 and January 30, 2022 were not material. material and were included in property and equipment, net, on the Company’s condensed consolidated balance sheets.
The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | As of |
Leases | | Balance Sheet Classification | | July 31, 2022 | | January 30, 2022 |
Assets | | | | | | |
Operating | | Operating lease right-of-use assets | | $ | 411,231 | | | $ | 372,693 | |
Total operating lease assets | | | | $ | 411,231 | | | $ | 372,693 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating | | Accrued expenses and other current liabilities | | $ | 22,841 | | | $ | 24,225 | |
Non-current | | | | | | |
Operating | | Operating lease liabilities | | 456,701 | | | 410,168 | |
Total operating lease liabilities | | | | $ | 479,542 | | | $ | 434,393 | |
|
| | | | | | |
Leases | | Balance Sheet Classification | | As of May 5, 2019 |
Assets | | | | |
Operating | | Operating lease right-of-use assets | | $ | 157,139 |
|
Total operating lease assets | | | | $ | 157,139 |
|
| | | | |
Liabilities | | | | |
Current | | | | |
Operating | | Accrued expenses and other current liabilities | | $ | 13,310 |
|
Non-current | | | | |
Operating | | Operating lease liabilities | | 177,636 |
|
Total operating lease liabilities | | | | $ | 190,946 |
|
For the twenty-six weeks ended July 31, 2022 and August 1, 2021, assets acquired in exchange for new operating lease liabilities were $57.1 million and $50.1 million, respectively. Lease expense primarily relatedrelates to operating lease costs. Lease expense for the thirteen weeks ended May 5, 2019July 31, 2022 and August 1, 2021 was $11.0 million, of which short-term and variable lease payments were $2.2$23.3 million and were$19.6 million, respectively. Lease expense for the twenty-six weeks ended July 31, 2022 and August 1, 2021 was $44.6 million and $38.6 million, respectively. The aforementioned lease expense was included within selling, general and administrative expenses in the condensed consolidated statements of operations.
As of May 5, 2019, the weighted-average remaining lease term and weighted-average discount rate forCash flows used in operating leases was 11.3 years and 11.8%, respectively.
Operating cash flowsactivities related to cash paid for operating leases were approximately $8.3$38.2 million and $32.0 million for the thirteentwenty-six weeks ended May 5, 2019.July 31, 2022 and August 1, 2021, respectively.
7. Share-Based Compensation
2022 Omnibus Incentive Plan
In July 2022, the Company’s stockholders approved the Chewy, Inc. 2022 Omnibus Incentive Plan (the “2022 Plan”) replacing the Chewy, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2022 Plan became effective on July 14, 2022 and allows for the issuance of up to 40.0 million shares of Class A common stock and 1.0 million shares for new grants rolled over from the 2019 Plan. No awards may be granted under the 2022 Plan after July 2032. The 2022 Plan provides for the grants of: (i) options, including incentive stock options and non-qualified stock options, (ii) restricted stock units, (iii) other share-based awards, including share appreciation rights, phantom stock, restricted shares, performance shares, deferred share units, and share-denominated performance units, (iv) cash awards, (v) substitute awards, and (vi) dividend equivalents (collectively the “awards”). The awards may be granted to (i) the Company’s employees, consultants, and non-employee directors, (ii) employees of the Company’s affiliates and subsidiaries, and (iii) consultants of the Company’s subsidiaries.
Service and Performance-Based Awards
The table below presentsCompany granted restricted stock units which vested upon satisfaction of both service-based vesting conditions and company performance-based vesting conditions (“PRSUs”), subject to the maturity of lease liabilitiesemployee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for PRSUs over the requisite service period and accounted for forfeitures as of May 5, 2019 (in thousands):they occur.
|
| | | |
| Operating Leases |
Remainder of 2019 | $ | 22,569 |
|
2020 | 35,946 |
|
2021 | 33,555 |
|
2022 | 31,248 |
|
2023 | 26,695 |
|
Thereafter | 215,409 |
|
Total lease payments | 365,422 |
|
Less: interest | 174,476 |
|
Present value of lease liabilities | $ | 190,946 |
|
Service and Performance-Based Awards Activity
The following table above includes all locationssummarizes the activity related to the Company’s PRSUs for whichthe twenty-six weeks ended July 31, 2022 (in thousands, except for weighted-average grant date fair value):
| | | | | | | | | | | |
| Number of PRSUs | | Weighted-Average Grant Date Fair Value |
Unvested and outstanding as of January 30, 2022 | 6,573 | | | $ | 36.16 | |
Granted | 86 | | | $ | 43.59 | |
Vested | (2,080) | | | $ | 36.24 | |
Forfeited | (218) | | | $ | 36.73 | |
Unvested and outstanding as of July 31, 2022 | 4,361 | | | $ | 36.24 | |
The total fair value of PRSUs that vested during the twenty-six weeks ended July 31, 2022 was $58.5 million. As of July 31, 2022, total unrecognized compensation expense related to unvested PRSUs was $13.2 million and is expected to be recognized over a weighted-average expected performance period of 1.2 years.
During the twenty-six weeks ended July 31, 2022 and August 1, 2021, vesting occurred for 93,309 PRSUs, respectively, previously granted to an employee of PetSmart. For accounting purposes, the issuance of Class A common stock upon vesting of these PRSUs is treated as a distribution to a parent entity because both the Company had the right to control the useand PetSmart are controlled by affiliates of the property. In addition, as of May 5, 2019 the Company had executed lease agreements which had not yet commenced with total future lease payments of $111.1 million. The weighted-average lease term for these leases is 16.1 years.BC Partners.
| | | | | |
| |
7. | Share-Based Compensation |
| |
| |
| |
Citrus Profits Interest PlanThe fair value for PRSUs with a Company performance-based vesting condition is established based on the market price of the Company’s Class A common stock on the date of grant.
Service-Based Awards
The Company granted restricted stock units with service-based vesting conditions (“RSUs”) which vested subject to the PetSmart Acquisition,employee’s continued employment with the Company’s share-based compensation included profits interests units granted by Citrus Intermediate Holdings L.P. (the “Citrus Partnership”), a newly established Delaware limited partnership (the “Citrus Profits Interest Plan”). The Citrus Partnership is a parent company of PetSmart and a wholly-owned subsidiary ofCompany through the Sponsors.applicable vesting date. The Company recognizes share-based compensation as equity contributions from the Citrus Partnership in its condensed consolidated financial statements for awards granted under the Citrus Profits Interest Plan as it relates to grantees’ services as employees of the Company.
During the thirteen weeks ended May 5, 2019 and April 29, 2018, the Company recognizedrecorded share-based compensation expense for RSUs on a straight-line basis over the requisite service period and accounted for forfeitures as they occur.
Service-Based Awards Activity
The following table summarizes the activity related to the Company’s RSUs for the twenty-six weeks ended July 31, 2022 (in thousands, except for weighted-average grant date fair value):
| | | | | | | | | | | |
| Number of RSUs | | Weighted-Average Grant Date Fair Value |
Unvested and outstanding as of January 30, 2022 | 3,207 | | | $ | 68.96 | |
Granted | 7,487 | | | $ | 42.79 | |
Vested | (516) | | | $ | 73.90 | |
Forfeited | (883) | | | $ | 55.01 | |
Unvested and outstanding as of July 31, 2022 | 9,295 | | | $ | 48.93 | |
The total fair value of $7.2RSUs that vested during the twenty-six weeks ended July 31, 2022 was $22.3 million. As of July 31, 2022, total unrecognized compensation expense related to unvested RSUs was $391.5 million and $3.3is expected to be recognized over a weighted-average expected performance period of 3.1 years.
The fair value for RSUs is established based on the market price of the Company’s Class A common stock on the date of grant.
As of July 31, 2022, there were 39.9 million respectively, in connection with awards grantedadditional shares of Class A common stock reserved for future issuance under the Citrus Profits Interest2022 Plan.
Share-Based Compensation Expense
Share-based compensation expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognized share-based compensation expense as follows (in thousands):
2019 Omnibus Incentive Plan | | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 |
PRSUs | $ | 3,559 | | | $ | 10,037 | | | $ | 8,198 | | | $ | 24,149 | |
RSUs | 34,818 | | | 11,741 | | | 55,973 | | | 20,735 | |
Total share-based compensation expense | $ | 38,377 | | | $ | 21,778 | | | $ | 64,171 | | | $ | 44,884 | |
In June 2019,
8. Income Taxes
Chewy is subject to taxation in the Company’s board of directors adoptedU.S. and approved the 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on June 13, 2019various state, local, and allows for the issuance of up to 31,864,865 shares of Class A common stock.
The 2019 Plan provides for the grant of stock options, including incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), restricted stock, dividend equivalents, stock payments, restricted stock units (“RSUs”), performance shares, other incentive awards, SARs, and cash awards (collectively “awards”). The awards may be granted to the Company’s employees, consultants, and directors, and the employees and consultants of the Company’s affiliates and subsidiaries.
In connection with the consummation of the IPO, the Company granted the following RSUs under the 2019 Plan:
•2,711,689 RSUs, which were fully vested upon consummation of the IPO,
•362,629 RSUs, which will vest within one year of consummation of the IPO, and
•21,693,634 RSUs, which will vest based on time-vesting conditions and share price hurdles.
There are 7,096,913 additional shares of Class A common stock reserved for future issuance under the 2019 Plan.
Subsequent to the PetSmart Acquisition, the Company’s losses were included with PetSmart’s consolidated U.S. federal and state income tax returns.foreign jurisdictions. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared based on theChewy’s separate return method as ifmethod. The Company’s losses and tax attributes were previously included in PetSmart’s consolidated tax return activity at the Company were a taxpayer separate from PetSmart.U.S. federal level and any applicable state and local level.
The Company did not have a current or deferred provision for income taxes for any taxing jurisdictionduring the thirteen and twenty-six weeks endedMay 5, 2019 July 31, 2022, and April 29, 2018.August 1, 2021. Additionally, the Company maintained a full valuation allowance on its net deferred tax assets.
Concurrent with its initial public offering during the IPO,fiscal year ended February 2, 2020, the Company, PetSmart, and PetSmartArgos Holdco entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company, PetSmart, and PetSmartArgos Holdco with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, local, and foreignlocal income taxes.
During the twenty-six weeks ended July 31, 2022, and August 1, 2021, the Company collected $0.5 million and $42.4 million, respectively, pursuant to the tax sharing agreement. The tax sharing agreement was effectively terminated for federal income taxes upon tax deconsolidation with PetSmart, however, there may be future settlements upon final adjustment to the consolidated federal tax returns. The tax sharing agreement remains in effect for certain states in which the Company continues to file with Argos Holdco. | |
9. | Net Loss
9. Earnings (Loss) per Share |
Basic and diluted net lossearnings (loss) per share attributable to common stockholders isare presented using the two classtwo-class method required for participating securities. Under the two classtwo-class method, net lossincome (loss) attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings for the periods presented are calculated as net lossincome (loss) less distributed earnings.
Undistributed earnings are allocated proportionally to common Class A and Class B stockholders as both classes are entitled to share equally, on a per share basis, in dividends and other distributions. Basic and diluted net lossearnings (loss) per share isare calculated by dividing net lossincome (loss) attributable to common stockholders by the weighted-average shares outstanding during the period. The weighted-average shares outstanding during the period reflects the reclassification of the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock. There were no shares of Class A common stock outstanding for the thirteen weeks ended May 5, 2019 or April 29, 2018.
For the thirteen weeks ended May 5, 2019 and April 29, 2018, the Company’s basic and diluted net loss per share attributable to common stockholders are the same because the Company has generated a net loss to common stockholders and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact.
The following table sets forth basic and diluted net lossearnings (loss) per share attributable to common stockholders for the periods presented (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended |
| July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 |
Basic and diluted earnings (loss) per share | | | | | | | |
Numerator | | | | | | | |
Earnings (loss) attributable to common Class A and Class B stockholders | $ | 22,345 | | | $ | (16,686) | | | $ | 40,817 | | | $ | 22,033 | |
Denominator | | | | | | | |
Weighted-average common shares used in computing earnings per share: | | | | | | | |
Basic | 421,690 | | 416,665 | | 421,048 | | 415,957 |
Effect of dilutive stock-based awards | 5,143 | | — | | 5,724 | | 11,501 |
Diluted | 426,833 | | 416,665 | | 426,772 | | 427,458 |
Anti-dilutive stock-based awards excluded from diluted common shares | 7,388 | | 11,913 | | 4,528 | | 66 |
Earnings (loss) per share attributable to common Class A and Class B stockholders: | | | | | | | |
Basic | $ | 0.05 | | | $ | (0.04) | | | $ | 0.10 | | | $ | 0.05 | |
Diluted | $ | 0.05 | | | $ | (0.04) | | | $ | 0.10 | | | $ | 0.05 | |
10. Certain Relationships and Related Party Transactions
|
| | | | | | | |
| 13 Weeks Ended |
| May 5, 2019 | | April 29, 2018 |
Common stockholders | | | |
Numerator: | | | |
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) |
Net loss attributable to common stockholders | $ | (29,554 | ) | | $ | (59,815 | ) |
| | | |
Denominator: | | | |
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 393,000 |
| | 393,000 |
|
| | | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.08 | ) | | $ | (0.15 | ) |
| |
10. | Certain Relationships and Related Party Transactions |
The Company’s condensed consolidated financial statements include management fee expenses of $0.3 million allocated to the Company by the Sponsors and the Parent for organizational oversight and certain limited corporate functions for the thirteen weeks ended May 5, 2019 and April 29, 2018, respectively. Allocated costs are included within selling, general and administrative expenses in the condensed consolidated statements of operations.
From time to time, prior to the completion of the IPO, the Company used funding from or provided funding to the Parent, as needed, in the normal course of business. The Company and PetSmart were parties to an intercompany loan agreement pursuant to which each party made loans from time to time to the other. As of May 5, 2019, PetSmart owed the Company $74.7 million under the agreement. In connection with the signing of an underwriting agreement pursuant to which the Company received substantially all of the net proceeds from the Company’s sale of shares of Class A common stock as part of the IPO, the loan agreement was terminated without cash repayment of the outstanding loan.
Certain of the Company’s pharmacyhealthcare operations are currently, and have been since launch on July 2, 2018, conducted through a wholly-owned subsidiary of PetSmart. ThePetSmart for which the Company hasand PetSmart entered into a services agreement with PetSmart thatwhich provides for the payment of a management fee due from PetSmart with respect to this arrangement.PetSmart. The Company recognized $10.5$1.8 million and $3.1 million during the thirteen and twenty-six weeks ended July 31, 2022, respectively, within net sales in the condensed consolidated statementstatements of operations for the services provided compared to $9.1 million and $19.7 million during the thirteen and twenty-six weeks ended May 5, 2019. The services agreement will remain in place for so long asAugust 1, 2021, respectively.
As of July 31, 2022, the Company conducts any pharmacy operations throughhad a net payable to PetSmart subsidiary.
In connection withof $1.0 million, which was included in accrued expenses and other current liabilities on the IPO,Company’s condensed consolidated balance sheets. As of January 30, 2022, the Company had a net receivable from PetSmart of $2.5 million, which was released from its obligations underincluded in prepaid expenses and other current assets on the Parent’s asset-backed revolving credit facility in accordance with its terms.Company's condensed consolidated balance sheets.
PetSmart Guarantees
PetSmart currently providespreviously provided a guarantee of payment with respect to certain equipment and other leases that the Company has entered into and servesserved as a guarantor in respect of the Company’s obligations under a credit insurance policy in favor of certain of the Company’s current or future suppliers. The Company has historically not paid PetSmart for anyAs of these guarantees.
On June 13, 2019,July 31, 2022, all such guarantees had been released, with the exception of guarantees pertaining to 1 of the Company’s 2019 Omnibus Incentive Plan became effective. See Note 7 for additional information.lease agreements.
14
On June 18, 2019, the Company completed its IPO. See Note 1 for additional information.
On June 18, 2019, the Company entered into a new five-year senior secured asset-backed credit facility. See Note 5 for additional information.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2022 (“10-Q Report”) and our final prospectus filed withaudited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 17, 2019 (the “Prospectus”fiscal year ended January 30, 2022 (“10-K Report”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein and in our 10-K Report, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries.
Investors and others should note that we may announce material financial information to our investors using our investor relations website (https://investor.chewy.com/), SECSecurities and Exchange Commission (the “SEC”) filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social mediathese channels could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
Overview
We are the largest pure-play pet e-tailer in the United States, offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and services, as well as the around-the-clock convenience, that only e-commerce can offer. We believe that we are the preeminent online destination for pet parents as a result of our broad selection of high-quality products and expanded menu of service offerings, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and partners and continually develop innovative ways for our customers to engage with us. We partner with more than 1,6003,000 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 45,000100,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
COVID-19
The COVID-19 pandemic has been a disruptive economic and societal event that has affected our business and consumer shopping behavior. As this crisis unfolded, we monitored conditions closely and adapted aspects of our logistics, transportation, supply chain and purchasing processes accordingly to meet federal, state, and local standards and to ensure the safety and well-being of our team members, while continuing to meet the needs of our rapidly growing community of pets and pet parents. We continue to monitor the impact of the COVID-19 pandemic and adapt our business accordingly. As reflected in the discussion below, we saw customers shift more of their total shopping spend to online channels during the peak of the COVID-19 outbreak, which has led to increased sales and order activity for our business.
Labor markets, particularly as they pertain to our fulfillment centers, have been, and remain, challenging. We expect this labor supply and demand imbalance to continue over the foreseeable future, resulting in increased competition for personnel. In addition, global supply chain shortages and disruptions and inflation have emerged, which have impacted, and continue to impact, sales, margins and the pace of economic recovery.
While conditions do appear to be improving as vaccination levels rise and state and local economies have, for the most part, re-opened, the positive or negative impacts that the COVID-19 outbreak will ultimately have on our business remain difficult to predict, particularly as vaccine efforts face challenges and new variants of the virus continue to emerge. We are still unable to predict the duration of the COVID-19 pandemic and its ultimate impact on the broader economy or our operations and liquidity. As such, risks and uncertainties regarding COVID-19remain. Please refer to the “Cautionary Note Regarding Forward-Looking Statements” in this 10-Q Report and in the section titled “Risk Factors” in Item 1A of Form 10-K for the fiscal year ended January 30, 2022.
Fiscal Year End
We have a 5252- or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that fiscal year. EachOur 2022 fiscal year generally consists of four 13-weekends on January 29, 2023 and is a 52-week year. Our 2021 fiscal quarters, with each fiscal quarter ending on the Sunday that is closest to the last day of the last month of the quarter.year ended January 30, 2022 and was a 52-week year.
On June 13, 2019, our registration statement on Form S-1 to our initial public offering (“IPO”) was declared effective by the SEC, and our common stock began trading on the New York Stock Exchange (“NYSE”) on June 14, 2019. Our IPO closed on June 18, 2019. As a result, our condensed consolidated financial statements as of May 5, 2019 do not reflect the impact of our IPO. For additional information, see Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Key Financial and Operating Data
We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
| | | 13 Weeks Ended | | | | 13 Weeks Ended | | 26 Weeks Ended | |
(in thousands, except net sales per active customer and percentages) | May 5, 2019 | | April 29, 2018 | | % Change | (in thousands, except net sales per active customer and percentages) | July 31, 2022 | | August 1, 2021 | | % Change | | July 31, 2022 | | August 1, 2021 | | % Change |
Financial and Operating Data | | | | | | Financial and Operating Data | | | | | | | | | | | |
Net sales | $ | 1,108,872 |
| | $ | 763,462 |
| | 45.2 | % | Net sales | $ | 2,431,011 | | | $ | 2,155,036 | | | 12.8 | % | | $ | 4,859,338 | | | $ | 4,290,214 | | | 13.3 | % |
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) | | 50.6 | % | |
Net income (loss)(1) | | Net income (loss)(1) | $ | 22,345 | | | $ | (16,686) | | | 233.9 | % | | $ | 40,817 | | | $ | 22,033 | | | 85.3 | % |
Net margin | | Net margin | 0.9 | % | | (0.8) | % | | 0.8 | % | | 0.5 | % | |
Adjusted EBITDA(1)(2) | $ | (15,766 | ) | | $ | (51,509 | ) | | 69.4 | % | $ | 83,055 | | | $ | 23,272 | | | 256.9 | % | | $ | 143,571 | | | $ | 100,626 | | | 42.7 | % |
Adjusted EBITDA margin(1)(2) | (1.4 | )% | | (6.7 | )% | | | 3.4 | % | | 1.1 | % | | 3.0 | % | | 2.3 | % | |
Net cash used in operating activities | $ | (51,141 | ) | | $ | (45,273 | ) | | (13.0 | )% | |
Net cash provided by operating activities | | Net cash provided by operating activities | $ | 49,172 | | | $ | 85,085 | | | (42.2) | % | | $ | 131,605 | | | $ | 183,451 | | | (28.3) | % |
Free cash flow(1)(2) | $ | (63,363 | ) | | $ | (58,734 | ) | | (7.9 | )% | $ | 981 | | | $ | 60,253 | | | (98.4) | % | | $ | 7,393 | | | $ | 119,737 | | | (93.8) | % |
Active customers | 11,321 |
| | 7,830 |
| | 44.6 | % | Active customers | 20,490 | | | 20,077 | | | 2.1 | % | | 20,490 | | | $ | 20,077 | | | 2.1 | % |
Net sales per active customer | $ | 343 |
| | $ | 314 |
| | 9.2 | % | Net sales per active customer | $ | 462 | | | $ | 404 | | | 14.4 | % | | $ | 462 | | | $ | 404 | | | 14.4 | % |
Autoship customer sales | $ | 743,853 |
| | $ | 477,449 |
| | 55.8 | % | Autoship customer sales | $ | 1,776,583 | | | $ | 1,513,944 | | | 17.3 | % | | $ | 3,530,264 | | | $ | 2,994,184 | | | 17.9 | % |
Autoship customer sales as a percentage of net sales | 67.1 | % | | 62.5 | % | | | Autoship customer sales as a percentage of net sales | 73.1 | % | | 70.3 | % | | 72.6 | % | | 69.8 | % | |
(1) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures. | |
| (1) Includes share-based compensation expense, including related taxes, of $39.7 million and $66.9 million for the thirteen and twenty-six weeks ended July 31, 2022, respectively, compared to $25.6 million and $50.4 million for the thirteen and twenty-six weeks ended August 1, 2021, respectively. | | (1) Includes share-based compensation expense, including related taxes, of $39.7 million and $66.9 million for the thirteen and twenty-six weeks ended July 31, 2022, respectively, compared to $25.6 million and $50.4 million for the thirteen and twenty-six weeks ended August 1, 2021, respectively. |
| (2) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures. | | (2) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures. |
We define net margin as net income (loss) divided by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this
10-Q Report adjusted EBITDA, a non-GAAP financial measure that we calculate as net lossincome (loss) excluding depreciation and amortization; share-based compensation expense;expense and related taxes; income tax provision; interest income (expense), net; management fee expense;transaction related costs; and non-routine items.litigation matters and other items that we do not consider representative of our underlying operations. We have provided a reconciliation below of adjusted EBITDA to net loss,income (loss), the most directly comparable GAAP financial measure.
We have included adjusted EBITDA and adjusted EBITDA margin in this 10-Q Report because iteach is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA and adjusted EBITDA margin facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA providesand adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
We believe it is useful to exclude non-cash charges, such as depreciation and amortization and share-based compensation expense and management fee expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; transaction related costs; and non-routinelitigation matters and other items as these itemswhich are not components of our core business operations. Adjusted EBITDA has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;
•adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy;
•adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;
•adjusted EBITDA excludes one-time non-routine items;does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including various cash flow metrics, net lossincome (loss), net margin, and our other GAAP results.
The following table presents a reconciliation of net lossincome (loss) to adjusted EBITDA, as well as the calculation of net margin and adjusted EBITDA margin, for each of the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands, except percentages) | 13 Weeks Ended | | 26 Weeks Ended |
Reconciliation of Net Income (Loss) to Adjusted EBITDA | July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 |
Net income (loss) | $ | 22,345 | | | $ | (16,686) | | | $ | 40,817 | | | $ | 22,033 | |
Add: | | | | | | | |
Depreciation and amortization | 20,338 | | | 12,691 | | | 37,678 | | | 24,117 | |
Share-based compensation expense and related taxes | 39,739 | | | 25,589 | | | 66,933 | | | 50,361 | |
Interest (income) expense, net | (690) | | | 500 | | | (346) | | | 902 | |
| | | | | | | |
Transaction related costs | 237 | | | 140 | | | 1,395 | | | 971 | |
Other | 1,086 | | | 1,038 | | | (2,906) | | | 2,242 | |
Adjusted EBITDA | $ | 83,055 | | | $ | 23,272 | | | $ | 143,571 | | | $ | 100,626 | |
Net sales | $ | 2,431,011 | | | $ | 2,155,036 | | | $ | 4,859,338 | | | $ | 4,290,214 | |
Net margin | 0.9 | % | | (0.8) | % | | 0.8 | % | | 0.5 | % |
Adjusted EBITDA margin | 3.4 | % | | 1.1 | % | | 3.0 | % | | 2.3 | % |
|
| | | | | | | |
($ in thousands, except percentages) | 13 Weeks Ended |
Reconciliation of Net Loss to Adjusted EBITDA | May 5, 2019 | | April 29, 2018 |
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) |
Add (deduct): | | | |
Depreciation and amortization | 6,949 |
| | 4,718 |
|
Share-based compensation expense | 7,230 |
| | 3,273 |
|
Income tax provision | — |
| | — |
|
Interest income, net | (716 | ) | | (10 | ) |
Management fee expense(1) | 325 |
| | 325 |
|
Adjusted EBITDA | $ | (15,766 | ) | | $ | (51,509 | ) |
Net sales | $ | 1,108,872 |
| | $ | 763,462 |
|
Adjusted EBITDA margin | (1.4 | )% | | (6.7 | )% |
(1) Management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions. Although we are not a party to the agreement governing the management fee, this management fee is reflected as an expense in our condensed consolidated financial statements. |
We define adjusted EBITDA margin as adjusted EBITDA divided by net sales.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this 10-Q Report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment, including servers and networking equipment, capitalization of labor related to our website, mobile applications, and software development, and leasehold improvements). We have provided a reconciliation below of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure.
We have included free cash flow in this 10-Q Report because it is used by our management and board of directors as an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Free cash flow has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.
The following table presents a reconciliation of net cash provided by (used in) operating activities to free cash flow for each of the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | 13 Weeks Ended | | 26 Weeks Ended |
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 |
Net cash provided by operating activities | $ | 49,172 | | | $ | 85,085 | | | $ | 131,605 | | | $ | 183,451 | |
Deduct: | | | | | | | |
Capital expenditures | (48,191) | | | (24,832) | | | (124,212) | | | (63,714) | |
Free Cash Flow | $ | 981 | | | $ | 60,253 | | | $ | 7,393 | | | $ | 119,737 | |
|
| | | | | | | |
($ in thousands) | 13 Weeks Ended |
Reconciliation of Net Cash Provided by (Used in) Operating Activities to Free Cash Flow | May 5, 2019 | | April 29, 2018 |
Net cash used in operating activities | $ | (51,141 | ) | | $ | (45,273 | ) |
Add (deduct): | | | |
Capital expenditures | (12,222 | ) | | (13,461 | ) |
Free Cash Flow | $ | (63,363 | ) | | $ | (58,734 | ) |
Free cash flow may be affected in the near to medium term by the timing of capital investments (such as the launch of new fulfillment centers, customer service centers, and corporate offices and purchases of IT and other equipment), fluctuations in our growth and the effect of such fluctuations on working capital, and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.
Key Operating Metrics
Active Customers
As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered a product or service, and for whom an ordera product has shipped or for whom a service has been provided, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as a key indicator of our growth—acquisition and retention of customers—as a result of our marketing efforts and the value we provide to our customers. The number of active customers has grown over time as we acquired new customers and retained previously acquired customers.
Net Sales Per Active Customer
We define net sales per active customer as the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior.
Autoship and Autoship Customer Sales
We define Autoship customers as customers in a given fiscal quarter for whomthat had an order has shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers), for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.
Autoship Customer Sales as a Percentage of Net Sales
We define Autoship customer sales as a percentage of net sales as the Autoship customer sales in a given reporting period divided by the net sales from all orders in that period. We view Autoship customer sales as a percentage of net sales as a key indicator of our recurring sales and customer retention.
Components of Results of Consolidated Operations
Net Sales
We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program.
We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.
Cost of Goods Sold
Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.
Selling, General and Administrative
Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs.
Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
Advertising and Marketing
Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on cash and cash equivalents held by us. In the future, we will recognize interest expense in connection with any borrowings under the new five-year senior secured asset-backed credit facility (the “ABL Credit Facility”). See “Other Liquidity Measures-ABL Credit Facility.”
Income Tax Provision
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions.
Results of Consolidated Operations
The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
| | | | | | | | 13 Weeks Ended | | 26 Weeks Ended |
| 13 Weeks Ended | | | | | % of net sales | | | | | % of net sales |
($ in thousands) | May 5, 2019 | | April 29, 2018 | ($ in thousands) | July 31, 2022 | | August 1, 2021 | | | % Change | | July 31, 2022 | | August 1, 2021 | | July 31, 2022 | | August 1, 2021 | | | % Change | | July 31, 2022 | | August 1, 2021 |
Consolidated Statements of Operations | | | | Consolidated Statements of Operations | | | | | | | | | | | | | | | | | | | | | |
Net sales | $ | 1,108,872 |
| | $ | 763,462 |
| Net sales | $ | 2,431,011 | | | $ | 2,155,036 | | | | 12.8 | % | | 100.0 | % | | 100.0 | % | | $ | 4,859,338 | | | $ | 4,290,214 | | | | 13.3 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 854,982 |
| | 613,474 |
| Cost of goods sold | 1,748,214 | | | 1,561,582 | | | | 12.0 | % | | 71.9 | % | | 72.5 | % | | 3,508,721 | | | 3,106,984 | | | | 12.9 | % | | 72.2 | % | | 72.4 | % |
Gross profit | 253,890 |
| | 149,988 |
| Gross profit | 682,797 | | | 593,454 | | | | 15.1 | % | | 28.1 | % | | 27.5 | % | | 1,350,617 | | | 1,183,230 | | | | 14.1 | % | | 27.8 | % | | 27.6 | % |
Operating expenses: | | | | Operating expenses: | | | | | |
Selling, general and administrative | 181,897 |
| | 123,152 |
| Selling, general and administrative | 516,983 | | | 437,672 | | | | 18.1 | % | | 21.3 | % | | 20.3 | % | | 1,021,266 | | | 843,892 | | | | 21.0 | % | | 21.0 | % | | 19.7 | % |
Advertising and marketing | 102,263 |
| | 86,661 |
| Advertising and marketing | 144,159 | | | 171,968 | | | | (16.2) | % | | 5.9 | % | | 8.0 | % | | 288,880 | | | 316,403 | | | | (8.7) | % | | 5.9 | % | | 7.4 | % |
Total operating expenses | 284,160 |
| | 209,813 |
| Total operating expenses | 661,142 | | | 609,640 | | | | 8.4 | % | | 27.2 | % | | 28.3 | % | | 1,310,146 | | | 1,160,295 | | | | 12.9 | % | | 27.0 | % | | 27.0 | % |
Loss from operations | (30,270 | ) | | (59,825 | ) | |
Interest income, net | 716 |
| | 10 |
| |
Loss before income tax provision | (29,554 | ) | | (59,815 | ) | |
Income (loss) from operations | | Income (loss) from operations | 21,655 | | | (16,186) | | | | 233.8 | % | | 0.9 | % | | (0.8) | % | | 40,471 | | | 22,935 | | | | 76.5 | % | | 0.8 | % | | 0.5 | % |
Interest income (expense), net | | Interest income (expense), net | 690 | | | (500) | | | | 238.0 | % | | — | % | | — | % | | 346 | | | (902) | | | | 138.4 | % | | — | % | | — | % |
Income (loss) before income tax provision | | Income (loss) before income tax provision | 22,345 | | | (16,686) | | | | 233.9 | % | | 0.9 | % | | (0.8) | % | | 40,817 | | | 22,033 | | | | 85.3 | % | | 0.8 | % | | 0.5 | % |
Income tax provision | — |
| | — |
| Income tax provision | — | | | — | | | | — | % | | — | % | | — | % | | — | | | — | | | | — | % | | — | % | | — | % |
Net loss | $ | (29,554 | ) | | $ | (59,815 | ) | |
Net income (loss) | | Net income (loss) | $ | 22,345 | | | $ | (16,686) | | | | 233.9 | % | | 0.9 | % | | (0.8) | % | | $ | 40,817 | | | $ | 22,033 | | | | 85.3 | % | | 0.8 | % | | 0.5 | % |
| | | | |
| 13 Weeks Ended | |
(% of net sales) | May 5, 2019 | | April 29, 2018 | |
Consolidated Statements of Operations | | | | |
Net sales | 100.0 | % | | 100.0 | % | |
Cost of goods sold | 77.1 |
| | 80.4 |
| |
Gross profit | 22.9 |
| | 19.6 |
| |
Operating expenses: |
| |
| |
Selling, general and administrative | 16.4 |
| | 16.1 |
| |
Advertising and marketing | 9.2 |
| | 11.4 |
| |
Total operating expenses | 25.6 |
| | 27.5 |
| |
Loss from operations | (2.7 | ) | | (7.8 | ) | |
Interest income, net | 0.1 |
| | — |
| |
Loss before income tax provision | (2.7 | ) | | (7.8 | ) | |
Income tax provision | — |
| | — |
| |
Net loss | (2.7 | )% | | (7.8 | )% | |
Thirteen and Twenty-Six Weeks Ended May 5, 2019July 31, 2022 Compared to Thirteen and Twenty-Six Weeks Ended April 29, 2018August 1, 2021
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | | | 26 Weeks Ended | | | | |
($ in thousands) | July 31, 2022 | | August 1, 2021 | | $ Change | | % Change | | July 31, 2022 | | August 1, 2021 | | $ Change | | % Change |
Consumables | $ | 1,712,832 | | | $ | 1,483,954 | | | $ | 228,878 | | | 15.4 | % | | $ | 3,410,971 | | | $ | 2,938,967 | | | $ | 472,004 | | | 16.1 | % |
Hardgoods | 290,804 | | | 318,593 | | | (27,789) | | | (8.7) | % | | 606,828 | | | 662,222 | | | (55,394) | | | (8.4) | % |
Other | 427,375 | | | 352,489 | | | 74,886 | | | 21.2 | % | | 841,539 | | | 689,025 | | | 152,514 | | | 22.1 | % |
Net sales | $ | 2,431,011 | | | $ | 2,155,036 | | | $ | 275,975 | | | 12.8 | % | | $ | 4,859,338 | | | $ | 4,290,214 | | | $ | 569,124 | | | 13.3 | % |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | |
($ in thousands) | May 5, 2019 | | April 29, 2018 | | $ Change | | % Change |
Consumables | $ | 872,315 |
| | $ | 607,290 |
| | $ | 265,025 |
| | 43.6 | % |
Hardgoods | 192,578 |
| | 140,462 |
| | 52,116 |
| | 37.1 | % |
Other | 43,979 |
| | 15,710 |
| | 28,269 |
| | 179.9 | % |
Net sales | $ | 1,108,872 |
| | $ | 763,462 |
| | $ | 345,410 |
| | 45.2 | % |
Net sales for the thirteen weeks ended May 5, 2019July 31, 2022 increased by $345.4$276.0 million, or 45.2%12.8%, to $1.1$2.4 billion compared to $763.5 million$2.2 billion for the thirteen weeks ended April 29, 2018.August 1, 2021. This increase was primarily due to growthincreases in spending per customer and our larger customer base, with the number ofbase. Net sales per active customers increasing by 3.5 million,customer increased $58, or 44.6%14.4%, in the thirteen weeks ended May 5, 2019July 31, 2022 compared to the thirteen weeks ended April 29, 2018, along with the increased spending amongAugust 1, 2021, driven by growth across our consumables and healthcare businesses, partially offset by a decline in sales in discretionary products, mainly hardgoods. In addition, our active customers.customer base increased by 0.4 million, or 2.1% year-over-year.
Net sales for the twenty-six weeks ended July 31, 2022 increased by $569.1 million, or 13.3%, to $4.9 billion compared to $4.3 billion for the twenty-six weeks ended August 1, 2021. This increase was primarily due to increases in spending per customer and our larger customer base. Net sales per active customer increased $58, or 14.4%, in the twenty-six weeks ended July 31, 2022 compared to the twenty-six weeks ended August 1, 2021, driven by growth across our consumables and healthcare businesses, partially offset by a decline in sales in discretionary products, mainly hardgoods. In addition, our active customer base increased by 0.4 million, or 2.1% year-over-year.
Cost of Goods Sold and Gross Profit
|
| | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | |
($ in thousands) | May 5, 2019 | | April 29, 2018 | | $ Change | | % Change |
Cost of goods sold | $ | 854,982 |
| | $ | 613,474 |
| | $ | 241,508 |
| | 39.4 | % |
Gross profit | $ | 253,890 |
| | $ | 149,988 |
| | $ | 103,902 |
| | 69.3 | % |
Gross margin | 22.9 | % | | 19.6 | % | | | | |
Cost of goods sold for the thirteen weeks ended May 5, 2019July 31, 2022 increased by $241.5$186.6 million, or 39.4%12.0%, to $855.0 million$1.7 billion compared to $613.5 million$1.6 billion in the thirteen weeks ended April 29, 2018.August 1, 2021. This increase was primarily due to a 42.1%4.8% increase in orders shipped, andas well as an increase in associated product, costs, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in ordersnet sales on a percentage basis, reflecting pricing strength and favorable changes in our mix of sales.
Cost of goods sold for the twenty-six weeks ended July 31, 2022 increased by $401.7 million, or 12.9%, to $3.5 billion compared to $3.1 billion in the twenty-six weeks ended August 1, 2021. This increase was primarily asdue to a result6.8% increase in orders shipped and associated product, outbound freight, and shipping supply costs. The increase in cost of negotiated cost reductions from productgoods sold was lower than the increase in net sales on a percentage basis, reflecting pricing strength and freight suppliers.favorable changes in our mix of sales.
Gross profit for the thirteen weeks ended May 5, 2019July 31, 2022 increased by $103.9$89.3 million, or 69.3%15.1%, to $253.9$682.8 million compared to $150.0$593.5 million in the thirteen weeks ended April 29, 2018.August 1, 2021. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirteen weeks ended May 5, 2019July 31, 2022 increased by 33060 basis points compared to the thirteen weeks ended April 29, 2018,August 1, 2021, primarily due to margin expansion across our consumables and healthcare businesses.
Gross profit for the twenty-six weeks ended July 31, 2022 increased by $167.4 million, or 14.1%, to $1.4 billion compared to $1.2 billion in the twenty-six weeks ended August 1, 2021. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a resultpercentage of negotiated cost reductions from productnet sales for the twenty-six weeks ended July 31, 2022 increased by 20 basis points compared to the twenty-six weeks ended August 1, 2021, primarily due to margin expansion across our consumables and freight suppliers.healthcare businesses.
Selling, General and Administrative
|
| | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | |
($ in thousands) | May 5, 2019 | | April 29, 2018 | | $ Change | | % Change |
Selling, general and administrative | $ | 181,897 |
| | $ | 123,152 |
| | $ | 58,745 |
| | 47.7 | % |
As a percentage of net sales | 16.4 | % | | 16.1 | % | | | | |
Selling, general and administrative expenses for the thirteen weeks ended May 5, 2019July 31, 2022 increased by $58.7$79.3 million, or 47.7%18.1%, to $181.9$517.0 million compared to $123.2$437.7 million in the thirteen weeks ended April 29, 2018.August 1, 2021. This increase was primarily due to an increase of $32.5$49.2 million in facilities expenses and other general and administrative expenses, principally due to increased headcount as a result of business growth and new initiatives, increases in software and cloud-based IT systems and charitable donations, as well as the opening of new corporate offices in Seattle, Washington. This also included an increase of $13.5 million in fulfillment costs largely attributable to increased investments to support the overall growth of our business, including the costs associated with the opening and operating of a newthree fulfillment centercenters and the expansion oftwo healthcare fulfillment centers and growth in fulfillment and customer service headcountheadcount. The increase also included a $16.6 million increase in non-cash share-based compensation expense.
Selling, general and launch of a new customer service centeradministrative expenses for the twenty-six weeks ended July 31, 2022 increased by $177.4 million, or 21.0%, to $1.0 billion compared to $843.9 million in the second quartertwenty-six weeks ended August 1, 2021. This was primarily due to an increase of 2018. We also expanded our corporate office and increased headcount$98.1 million in IT, merchandising,facilities expenses and other corporate departmentsgeneral and administrative expenses, principally due to increased headcount as a result of business growth and new initiatives, increases in software and cloud-based IT systems and charitable donations, as well as the opening of new corporate offices in Seattle, Washington. This also in contemplation of becoming a public company, resulting inincluded an increase of $60.0 million in fulfillment costs largely attributable to investments to support the overall growth of our business, including the costs associated with the opening and operating of four fulfillment centers and two healthcare fulfillment centers and growth in fulfillment and customer service headcount. The increase also included a $19.3 million increase in non-cash share-based compensation and facilities expense and other general and administrative items of $26.2 million.expense.
Advertising and Marketing
|
| | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | |
($ in thousands) | May 5, 2019 | | April 29, 2018 | | $ Change | | % Change |
Advertising and marketing | $ | 102,263 |
| | $ | 86,661 |
| | $ | 15,602 |
| | 18.0 | % |
As a percentage of net sales | 9.2 | % | | 11.4 | % | | | | |
Advertising and marketing expenses for the thirteen weeks ended May 5, 2019 increasedJuly 31, 2022 decreased by $15.6$27.8 million, or 18.0%16.2%, to $102.3$144.2 million compared to $86.7$172.0 million in the thirteen weeks ended April 29, 2018, but overallAugust 1, 2021. Increased measurement capabilities allowing for more efficient application of marketing spend declined as a percentage of net sales to 9.2% from 11.4% inand lower advertising input costs during the thirteen weeks ended April 29, 2018. There wasJuly 31, 2022, led to a $14.2 million increasedecrease in advertisingexpenses. Our marketing efforts and marketing spending through existing channels in the thirteen weeks ended May 5, 2019 which contributedinvestments led to an increase in the number of 0.4 million active customers by 3.5 million.since August 1, 2021.
Interest Income (Expense), Net
|
| | | | | | | | | | | | | | |
| 13 Weeks Ended | | | | |
($ in thousands) | May 5, 2019 | | April 29, 2018 | | $ Change | | % Change |
Interest income, net | $ | 716 |
| | $ | 10 |
| | $ | 706 |
| | 7,060.0 | % |
As a percentage of net sales | 0.1 | % | | — | % | | | | |
Interest income, netAdvertising and marketing expenses for the thirteentwenty-six weeks ended May 5, 2019 increased $0.7July 31, 2022 decreased by $27.5 million, or 8.7%, to $288.9 million compared to $316.4 million in the thirteentwenty-six weeks ended April 29, 2018. This increase was primarily due to intercompany interest income on net amounts due from Parent.
Income Tax Provision
Income tax provision was zeroAugust 1, 2021. Increased measurement capabilities allowing for more efficient application of marketing spend and lower advertising input costs during the thirteentwenty-six weeks ended May 5, 2019July 31, 2022, led to a decrease in expenses. Our marketing efforts and April 29, 2018 as we maintained a full valuation allowance against our net deferred tax assets.investments led to an increase of 0.4 million active customers since August 1, 2021.
Liquidity and Capital Resources
Since our inception, we have financedWe finance our operations and capital expenditures primarily through sales of convertible redeemable preferred stock and cash flows generated by operations.operations and equity offerings. Our principal sources of liquidity are expected to be our cash and cash equivalents and our new revolving credit facility. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds.funds, U.S. Treasury securities, certificates of deposit, and commercial paper. Cash and cash equivalents totaled $29.3$606.8 million as of May 5, 2019, a decreaseJuly 31, 2022, an increase of $59.0$3.7 million from February 3, 2019.January 30, 2022.
We believe that our cash and cash equivalents and availability under our new revolving credit facility will be sufficient to fund our working capital, and capital expenditure requirements, and contractual obligations for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” herein.in Item 1A of our 10-K Report. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.
Cash Flows
| | | | | | | | | | | |
| 26 Weeks Ended |
($ in thousands) | July 31, 2022 | | August 1, 2021 |
Net cash provided by operating activities | $ | 131,605 | | | $ | 183,451 | |
Net cash used in investing activities | $ | (125,612) | | | $ | (63,714) | |
Net cash (used in) provided by financing activities | $ | (2,272) | | | $ | 41,915 | |
|
| | | | | | | |
| 13 Weeks Ended |
| May 5, 2019 | | April 29, 2018 |
Net cash used in operating activities | $ | (51,141 | ) | | $ | (45,273 | ) |
Net cash used in investing activities | $ | (8,165 | ) | | $ | (3,486 | ) |
Net cash provided by financing activities | $ | 273 |
| | $ | 325 |
|
Operating Activities
Cash provided by (used in) operating activities consisted of net loss adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and certain other non-cash items, as well as the effect of changes in working capital and other activities.
Net cash used inprovided by operating activities was $51.1$131.6 million for the thirteentwenty-six weeks ended May 5, 2019 ,July 31, 2022, which primarily consistingconsisted of $29.6$40.8 million of net loss, adjusted for certainincome, non-cash items, which primarily includedadjustments such as depreciation and amortization expense of $6.9$37.7 million and $7.2 million of share-based compensation expense of $64.2 million, and a cash decrease of $22.9 million from working capital. Cash decreases from working capital were primarily driven by an increase in inventories, receivables, and other current assets, as well as a $41.1 million increase in cash consumed by working capital primarily driven by higher inventories, accounts receivable, prepaid expenses and other current assets, and lower accrued expenses anddecrease to other current liabilities, partially offset by higher accounts payable.an increase in payables.
Net cash used inprovided by operating activities was $45.3$183.5 million for the thirteentwenty-six weeks ended April 29, 2018,August 1, 2021, which primarily consistingconsisted of $59.8$22.0 million of net loss, adjusted for certainincome, non-cash items, which primarily includedadjustments such as depreciation and amortization expense of $4.7$24.1 million and $3.3 million of share-based compensation expense as well asof $44.9 million, and a $2.1cash increase of $91.8 million decrease in cash consumed byfrom working capital. Cash increases from working capital were primarily driven by an increase in our accounts payableother current liabilities and payables, as well as a decrease in our accounts receivableinventories, partially offset by higher inventories, higher prepaid expenses andan increase in other current assets and lower accrued expenses and other current liabilities.receivables.
Investing Activities
Our primary investing activities consisted of purchases of property and equipment, mainly for the launch and expansion of our physical fulfillment capabilities, as well as purchases of servers and networking equipment, leasehold improvements, and capitalization of labor related to our website, mobile applications, and other software.
Net cash used in investing activities was $8.2$125.6 million for the thirteentwenty-six weeks ended May 5, 2019 ,July 31, 2022, primarily consisting of $12.2 million of capital expenditures related to the launch of new fulfilmentand future fulfillment centers the expansion of corporate and customer services offices, and additional investments in IT hardware and software, partially offset by $4.1 million of cash reimbursements, net of advances from PetSmart. software.
Net cash used in investing activities was $3.5$63.7 million for the thirteentwenty-six weeks ended April 29, 2018,August 1, 2021, primarily consisting of $13.5 million of costscapital expenditures related to the launch of three new and future fulfillment centers the expansion of corporate and customer service offices, and additional investments in IT hardware and software,software.
Financing Activities
Net cash used in financing activities was $2.3 million for the twenty-six weeks ended July 31, 2022 and consisted of $2.5 million for payments of tax withholdings related to vesting of share-based compensation awards and principal repayments of finance lease obligations, partially offset by $10.0 million of cash reimbursements, net of advances from PetSmart.proceeds received pursuant to the tax sharing agreement with related parties.
Net cash provided by financing activities was $0.3$41.9 million for the thirteentwenty-six weeks ended May 5, 2019August 1, 2021, and April 29, 2018, primarily consistingconsisted of a $0.3$42.4 million management fee expense allocatedreceived pursuant to usthe tax sharing agreement with related parties, partially offset by PetSmart for organizational oversight and certain limited corporate functions.principal payments of finance lease obligations.
Other Liquidity Measures
ABL Credit Facility
On June 18, 2019, we entered into the ABLWe have a five-year senior secured asset-based credit facility (the “ABL Credit FacilityFacility”) which matures in August 2026 and provides for non-amortizing revolving loans in anthe aggregate principal amount of up to $300$500 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $100$300 million, subject to customary conditions.
Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at our option, either a base rate or a LIBOR rate. The applicable margin is generally determined based on the average excess liquidity during the immediately preceding fiscal quarter as a percentage of the maximum borrowing amount under the ABL Credit Facility, and is between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. We are also required to pay a pay0.25% commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility.
All obligations Based on our borrowing base as of July 31, 2022, which is reduced by standby letters of credit, we had $449.9 million of borrowing capacity under the ABL Credit Facility are guaranteed on a senior secured first-lien basis by the our wholly-owned domestic subsidiaries, subject to certain exceptions, and secured, subject to permitted liens and other exceptions, by a perfected first-priority security interest in substantially allFacility. As of our and our wholly-owned domestic subsidiaries’ assets.
The ABL Credit Facility contains a number of covenants that, among other things, restrict our and our restricted subsidiaries’ ability to:
•incur or guarantee additional debt and issue certain equity securities;
•make certain investments and acquisitions;
•make certain restricted payments and payments of certain indebtedness;
•incur certain liens or permit them to exist;
•enter into certain types of transactions with affiliates;
•merge or consolidate with another company; and
•transfer, sell or otherwise dispose of assets.
Each of these restrictions is subject to various exceptions.
In addition,July 31, 2022, we had no outstanding borrowings under the ABL Credit Facility requires us to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the facility is less than the greater of 10% of the maximum borrowing amount and $30.0 million for a certain period of time. The ABL Credit Facility also contains certain customary affirmative covenants and events of default for facilities of this type, including an event of default upon a change in control.Facility.
Contractual Obligations
There have been no material changes to our contractual obligations as compared to those described in Contractual Obligations included in Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Prospectus, except as disclosed in Note 4 in the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 in the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
ForThere have been no material changes to the quantitative and qualitative disclosures about market risk please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Quantitative and Qualitative Disclosures About Market Risk” ofdisclosed in our Prospectus. Our exposures to market risk have not changed materially since February 3, 2019.Annual Report on Form 10-K for the fiscal year ended January 30, 2022.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this 10-Q Report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of May 5, 2019.July 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the thirteen weeks ended May 5, 2019 .July 31, 2022. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of remote working on our internal controls.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in variousInformation concerning legal proceedings arising from the normal courseis provided in Item 1 of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition.Part I, “Financial Statements (Unaudited)–Note 4– Commitments and Contingencies–Legal Matters” and is incorporated by reference herein.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our prospectus, dated June 13, 2019 and filed with the SEC on June 17, 2019 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
On June 18, 2019, we closed our IPO, in which we sold 5.6 million shares of our Class A common stock at a price of $22.00 per share. In addition, a wholly-owned subsidiary of PetSmart, the selling stockholder in our IPO, sold 47,875,000 shares of our Class A common stock (which included 6,975,000 of our Class A common stock that were issued pursuant to the underwriters’ exercise in full of their option to purchase additional shares) at a price of $22.00 per share less underwriting discounts and commissions. The offer and sale of the shares in the IPO were registered under the Securities Act pursuant to a registration statementAnnual Report on Form S-1 (File No. 333-231095), which was declared effective by10-K for the SEC on June 13, 2019. Upon completion of the sale of the shares of our Class A common stock, the IPO terminated. We raised approximately $111.5 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.2 million and offering expenses of approximately $5.5 million. We did not receive any proceeds from the sale of shares by the selling stockholder. We intend to use the net proceeds we received from our IPO for working capital and general corporate purposes. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the Securities and Exchange Commission on June 17, 2019 pursuant to Rule 424(b)(4). The representatives of the underwriters of our IPO were Morgan Stanley & Co. LLC and J.P. Morgan Securities, LLC.
fiscal year ended January 30, 2022.
Item 6. Exhibits | | | | | | | | | | | | | | | | | | | | |
| | Incorporation by Reference | |
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith |
10.1 | | DEF 14A | 001-38936 | Filed as Appendix B | May 26, 2022 | |
10.2 | | | | | | X |
31.1 | | | | | | X |
31.2 | | | | | | X |
32.1 | | | | | | X |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | X |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | X |
* Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto |
|
| | | | | | |
| | Incorporation by Reference | |
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith |
3.1 | | 8-K | 001-38936 | 3.1 | June 18, 2019 | |
3.2 | | 8-K | 001-38936 | 3.2 | June 18, 2019 | |
10.1 | | 8-K | 001-38936 | 10.1 | June 18, 2019 | |
10.2 | | S-1/A | 333-231095 | 10.2 | June 3, 2019 | |
10.3 | | S-8 | 333-232188 | 4.1 | June 18, 2019 | |
10.4 | | 8-K | 001-38936 | 10.2 | June 18, 2019 | |
10.5 | | 8-K | 001-38936 | 10.3 | June 18, 2019 | |
10.6 | | S-1 | 333-231095 | 10.6 | April 29, 2019 | |
10.7 | | S-1/A | 333-231095 | 10.7 | May 30, 2019 | |
10.8 | | S-1/A | 333-231095 | 10.8 | June 3, 2019 | |
10.9 | | S-1/A | 333-231095 | 10.10 | May 17, 2019 | |
10.10 | | S-1/A | 333-231095 | 10.11 | May 30, 2019 | |
10.11 | | S-1/A | 333-231095 | 10.11 | June 3, 2019 | |
10.12 | | S-1/A | 333-231095 | 10.12 | June 3, 2019 | |
10.13 | | S-1/A | 333-231095 | 10.13 | June 3, 2019 | |
10.14 | | S-1/A | 333-231095 | 10.14 | June 3, 2019 | |
31.1 | | | | | | X |
31.2 | | | | | | X |
32.1 | | | | | | X |
101.INS | XBRL Instance Document | | | | | X |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | X |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | X |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | CHEWY, INC. |
| | | |
| | | |
| | | CHEWY, INC. |
| | | |
Date: | July 18, 2019 | By: | /s/ Sumit Singh |
Date: | August 30, 2022 | By: | Sumit Singh |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: | July 18, 2019 | By: | /s/ Mario Marte |
| | | Mario Marte |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |