UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended May 5, 2019October 29, 2023
or
For the transition period from ____ to ____
Commission File Number: 001-38936
CHEWY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 90-1020167 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 33322 | ||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(786) 320-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A Common Stock, par value $0.01 per share | CHWY | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ ☒No x☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). Yes x ☒No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | Accelerated filer | ||||||||||
| Non-accelerated filer | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ ☐No x☒
| Class | Outstanding as of | |||||||
| Class A Common Stock, $0.01 par value per share | ||||||||
| Class B Common Stock, $0.01 par value per share | ||||||||
CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended May 5, 2019October 29, 2023
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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:
•sustain our recent growth rates and successfully manage challenges to our future growth, effectively;including introducing new products or services, improving existing products and services, and expanding into new offerings;
•successfully manage risks related to the macroeconomic environment, including any adverse impacts on our business operations, financial performance, supply chain, workforce, facilities, customer services and operations;
•acquire and retain new customers in a cost-effective manner and increase our net sales, per active customer;improve margins and maintain profitability;
•maintain positive perceptions of our company and their impact on consumer spending patterns, particularly inpreserve, grow and leverage the pet products market,value of our reputation and accurately our brand;
•limit operating losses as we continue to expand our business;
•forecast net sales and appropriately plan our expenses in the future;
•strengthen our current supplier relationships, retain key suppliers and improve existing products;
source additional or strengthen our existing relationships with, suppliers;
•negotiate acceptable pricing and other terms with third-party service providers, suppliers and outsourcing partners and maintain our relationships with such entities;parties;
•mitigate changes in, or disruptions to, our shipping arrangements and operations;
•optimize, operate and manage the expansion of the capacity of our fulfillment centers;
•provide our customers with a cost-effective platform that is able to respond and adapt to rapid changes in technology;
•limit our losses related to online payment methods;
•maintain and scale our technology, including the reliability of our website, mobile applications, and network infrastructure;
•maintain adequate cybersecurity with respect to our systems and ensure that our third-party service providers do the same with respect to their systems;
•maintain consumer confidence in the safety, quality and qualityhealth of our vendor-suppliedproducts;
•limit risks associated with our suppliers and private brand food products and hardgood products;our outsourcing partners;
•comply with existing or future laws and regulations in a cost-efficient manner;
•compete with other retailers and service providers;
•utilize tax attributes, net operating loss and tax credit carryforwards, and limit fluctuations in our tax obligations and effective tax rate;
•adequately protect our intellectual property rights;
•successfully defend ourselves against any allegations or claims that we may be subject to;
•attract, develop, motivate and retain well-qualifiedhighly-qualified and skilled employees;
•predict and respond to economic conditions, industry trends, and market conditions, and their impact on the pet products market;
•respond to severe weather and limit disruption to normal business operations;
•manage new acquisitions, investments or alliances, and integrate them into our intellectual property rightsexisting business;
•successfully compete in the pet insurance market;
•manage challenges presented by international markets;
•successfully compete in the pet products and successfully defend ourselves against any intellectual property infringement claims or other allegations that we may be subject to.services health and retail industry, especially in the e-commerce sector;
•raise capital as needed; and
•maintain effective internal control over financial reporting and disclosure controls and procedures.
1
You should not rely on forward-looking statements as predictions of future events.events, and you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of factors. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current assumptions, expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023, our subsequent quarterly reports, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
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 such information provides a reasonable basis for these statements, thatthis 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.
Investors and others should note that we may announce material financial information to our investors using our investor relations website (https://investor.chewy.com/), SEC filings with the Securities and Exchange Commission (the “SEC”), 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.
2
Item 1. Financial Statements (Unaudited)
CHEWY, INC.
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 | |||
(in thousands, except share and per share data)
| As of | |||||||||||
| October 29, 2023 | January 29, 2023 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 469,409 | $ | 330,441 | |||||||
| Marketable securities | 487,772 | 346,944 | |||||||||
| Accounts receivable | 160,980 | 126,349 | |||||||||
| Inventories | 712,053 | 675,520 | |||||||||
| Prepaid expenses and other current assets | 52,713 | 41,067 | |||||||||
| Total current assets | 1,882,927 | 1,520,321 | |||||||||
| Property and equipment, net | 514,701 | 478,738 | |||||||||
| Operating lease right-of-use assets | 473,529 | 423,423 | |||||||||
| Goodwill | 39,442 | 39,442 | |||||||||
| Other non-current assets | 25,883 | 53,152 | |||||||||
| Total assets | $ | 2,936,482 | $ | 2,515,076 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 1,078,429 | $ | 1,030,882 | |||||||
| Accrued expenses and other current liabilities | 886,259 | 738,467 | |||||||||
| Total current liabilities | 1,964,688 | 1,769,349 | |||||||||
| Operating lease liabilities | 526,994 | 471,765 | |||||||||
| Other long-term liabilities | 51,633 | 60,005 | |||||||||
| Total liabilities | 2,543,315 | 2,301,119 | |||||||||
| Commitments and contingencies (Note 6) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of October 29, 2023 and January 29, 2023 | — | — | |||||||||
| Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 119,950,022 and 114,160,531 shares issued and outstanding as of October 29, 2023 and January 29, 2023, respectively | 1,199 | 1,141 | |||||||||
| Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 311,188,356 shares issued and outstanding as of October 29, 2023 and January 29, 2023 | 3,112 | 3,112 | |||||||||
| Additional paid-in capital | 2,345,082 | 2,171,247 | |||||||||
| Accumulated deficit | (1,956,226) | (1,961,543) | |||||||||
| Total stockholders’ equity | 393,167 | 213,957 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,936,482 | $ | 2,515,076 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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 | 39 Weeks Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Net sales | $ | 2,738,611 | $ | 2,532,122 | $ | 8,301,055 | $ | 7,391,460 | |||||||||||||||
| Cost of goods sold | 1,957,850 | 1,811,945 | 5,942,066 | 5,320,666 | |||||||||||||||||||
| Gross profit | 780,761 | 720,177 | 2,358,989 | 2,070,794 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 611,718 | 543,532 | 1,814,586 | 1,564,798 | |||||||||||||||||||
| Advertising and marketing | 179,200 | 177,079 | 548,424 | 465,959 | |||||||||||||||||||
| Total operating expenses | 790,918 | 720,611 | 2,363,010 | 2,030,757 | |||||||||||||||||||
| (Loss) income from operations | (10,157) | (434) | (4,021) | 40,037 | |||||||||||||||||||
| Interest income, net | 10,173 | 2,745 | 27,117 | 3,091 | |||||||||||||||||||
| Other expense, net | (34,122) | — | (13,768) | — | |||||||||||||||||||
| (Loss) income before income tax provision | (34,106) | 2,311 | 9,328 | 43,128 | |||||||||||||||||||
| Income tax provision | 1,704 | — | 4,011 | — | |||||||||||||||||||
| Net (loss) income | $ | (35,810) | $ | 2,311 | $ | 5,317 | $ | 43,128 | |||||||||||||||
| (Loss) earnings per share attributable to common Class A and Class B stockholders: | |||||||||||||||||||||||
| Basic | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
| Diluted | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
| Weighted-average common shares used in computing (loss) earnings per share: | |||||||||||||||||||||||
| Basic | 430,758 | 422,898 | 428,743 | 421,665 | |||||||||||||||||||
| Diluted | 430,758 | 428,125 | 431,406 | 427,223 | |||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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
(in thousands)
(Unaudited)
| 13 Weeks Ended October 29, 2023 | |||||||||||||||||||||||||||||||||||
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of July 30, 2023 | 429,718 | $ | 4,297 | $ | 2,280,748 | $ | (1,920,416) | $ | 364,629 | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 64,348 | — | 64,348 | ||||||||||||||||||||||||||||||
| Vesting of share-based compensation awards | 1,420 | 14 | (14) | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | (35,810) | (35,810) | ||||||||||||||||||||||||||||||
| Balance as of October 29, 2023 | 431,138 | $ | 4,311 | $ | 2,345,082 | $ | (1,956,226) | $ | 393,167 | ||||||||||||||||||||||||||
| 13 Weeks Ended October 30, 2022 | |||||||||||||||||||||||||||||||||||
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | 422,647 | $ | 4,226 | $ | 2,083,123 | $ | (1,969,958) | $ | 117,391 | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 45,530 | — | 45,530 | ||||||||||||||||||||||||||||||
| Vesting of share-based compensation awards | 448 | 5 | (5) | — | — | ||||||||||||||||||||||||||||||
| Tax withholdings for share-based compensation awards | — | — | (3) | — | (3) | ||||||||||||||||||||||||||||||
| Tax sharing agreement with related parties | — | — | (1,274) | — | (1,274) | ||||||||||||||||||||||||||||||
| Net income | — | — | — | 2,311 | 2,311 | ||||||||||||||||||||||||||||||
| Balance as of October 30, 2022 | 423,095 | $ | 4,231 | $ | 2,127,371 | $ | (1,967,647) | $ | 163,955 | ||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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 | $ | — | |||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| 39 Weeks Ended October 29, 2023 | |||||||||||||||||||||||||||||||||||
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of January 29, 2023 | 425,349 | $ | 4,253 | $ | 2,171,247 | $ | (1,961,543) | $ | 213,957 | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 178,897 | — | 178,897 | ||||||||||||||||||||||||||||||
| Vesting of share-based compensation awards | 5,696 | 57 | (57) | — | — | ||||||||||||||||||||||||||||||
| Distribution to parent | 93 | 1 | (1) | — | — | ||||||||||||||||||||||||||||||
| Tax withholdings for share-based compensation awards | — | — | (5) | — | (5) | ||||||||||||||||||||||||||||||
| Tax sharing agreement with related parties | — | — | (4,999) | — | (4,999) | ||||||||||||||||||||||||||||||
| Net income | — | — | — | 5,317 | 5,317 | ||||||||||||||||||||||||||||||
| Balance as of October 29, 2023 | 431,138 | $ | 4,311 | $ | 2,345,082 | $ | (1,956,226) | $ | 393,167 | ||||||||||||||||||||||||||
| 39 Weeks Ended October 30, 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 | — | — | 109,701 | — | 109,701 | ||||||||||||||||||||||||||||||
| Vesting of share-based compensation awards | 2,949 | 30 | (30) | — | — | ||||||||||||||||||||||||||||||
| Distribution to parent | 93 | 1 | (1) | — | — | ||||||||||||||||||||||||||||||
| Tax withholdings for share-based compensation awards | (53) | (1) | (2,474) | — | (2,475) | ||||||||||||||||||||||||||||||
| Tax sharing agreement with related parties | — | — | (1,135) | — | (1,135) | ||||||||||||||||||||||||||||||
| Net income | — | — | — | 43,128 | 43,128 | ||||||||||||||||||||||||||||||
| Balance as of October 30, 2022 | 423,095 | $ | 4,231 | $ | 2,127,371 | $ | (1,967,647) | $ | 163,955 | ||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| 39 Weeks Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 5,317 | $ | 43,128 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 82,195 | 60,696 | |||||||||
| Share-based compensation expense | 178,897 | 109,701 | |||||||||
| Non-cash lease expense | 29,371 | 29,286 | |||||||||
| Change in fair value of equity warrants and investments | 13,589 | — | |||||||||
| Other | 3,810 | 840 | |||||||||
| Net change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (34,631) | (3,453) | |||||||||
| Inventories | (36,533) | (118,719) | |||||||||
| Prepaid expenses and other current assets | (27,363) | (6,237) | |||||||||
| Other non-current assets | (1,337) | (44,220) | |||||||||
| Trade accounts payable | 47,547 | 108,635 | |||||||||
| Accrued expenses and other current liabilities | 144,599 | 42,306 | |||||||||
| Operating lease liabilities | (19,774) | (15,790) | |||||||||
| Other long-term liabilities | 1,669 | 42,847 | |||||||||
| Net cash provided by operating activities | 387,356 | 249,020 | |||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (110,898) | (171,841) | |||||||||
| Cash paid for acquisition of business, net of cash acquired | (367) | — | |||||||||
| Purchases of marketable securities | (876,189) | (296,624) | |||||||||
| Proceeds from maturities of marketable securities | 750,000 | — | |||||||||
| Other | — | (1,400) | |||||||||
| Net cash used in investing activities | (237,454) | (469,865) | |||||||||
| Cash flows from financing activities | |||||||||||
| Payments for tax sharing agreement with related parties | (10,279) | (1,040) | |||||||||
| Principal repayments of finance lease obligations | (475) | (492) | |||||||||
| Payment of debt modification costs | (175) | — | |||||||||
| Payments for tax withholdings related to vesting of share-based compensation awards | (5) | (2,475) | |||||||||
| Net cash used in financing activities | (10,934) | (4,007) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 138,968 | (224,852) | |||||||||
| Cash and cash equivalents, as of beginning of period | 330,441 | 603,079 | |||||||||
| Cash and cash equivalents, as of end of period | $ | 469,409 | $ | 378,227 | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On October 30, 2023 (the “Closing Date”), the Company entered into certain transactions (the “Transactions”) with affiliates of BC Partners.
Contemporaneously with the execution and delivery of the Merger Agreement, the Company and the BC Partners-affiliated stockholders named therein (the “BCP Stockholder Parties”) entered into an Amended and Restated Investor Rights Agreement (the “A&R Investor Rights Agreement”), which amended and restated in its initial public offering (“IPO”), in which it issuedentirety that certain Investor Rights Agreement, dated as of June 13, 2019, by and sold 5.6 million sharesamong the Company and the stockholders identified therein. The A&R Investor Rights Agreement contains changes to the governing arrangements between the BCP Stockholder Parties and the Company, including (i) the gradual elimination of itsthe Company’s dual class share structure through the conversion of the Company’s Class B common stock (ten votes per share) into Class A common stock. The price at IPO was $22.00stock (one vote per share. The Company received net proceeds of approximately $111.5 million from the IPO after deducting underwriting discounts and commissions of $6.2 million and offering expenses.
On the Closing Date, affiliates of BC Partners transferred $1.9 billion to the Company to be used to fund: (i) tax obligations of its affiliates that were inherited by the Company as a result of the Transactions and (ii) expenses incurred by the Company in connection with the IPO, 47,875,000 sharesTransactions. The Company is evaluating the related tax obligations and an estimate is currently unavailable. The Merger Agreement requires affiliates of BC Partners to indemnify the Company’s Class B common stock were reclassified into sharesCompany for certain tax liabilities and includes customary indemnifications related to the Transactions.
2. Basis 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 stockPresentation 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.Significant Accounting Policies
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.codification (“ASC”). 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, 2019October 29, 2023 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, 2019October 29, 2023 (“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 29, 2023 (“10-K Report”).
8
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 2023 fiscal year generally consists of four 13-weekends on January 28, 2024 and is a 52-week year. The Company’s 2022 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 29, 2023 and was a 52-week year.
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.compensation and equity warrants. 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.
The following table presents the components of accrued expenses and other current liabilities (in thousands):
| As of | |||||||||||
| October 29, 2023 | January 29, 2023 | ||||||||||
| Outbound fulfillment | $ | 488,209 | $ | 369,661 | |||||||
| Advertising and marketing | 107,790 | 99,593 | |||||||||
| Payroll liabilities | 67,213 | 66,799 | |||||||||
| Accrued expenses and other | 223,047 | 202,414 | |||||||||
| Total accrued expenses and other current liabilities | $ | 886,259 | $ | 738,467 | |||||||
| 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 | |||
Conversion of Class B Common Stock
On May 8, 2020, Buddy Chester Sub LLC, a wholly-owned subsidiary of the Sponsors, converted 17,584,098 shares of the Company’s Class B common stock into Class A common stock. On May 11, 2020, Buddy Chester Sub LLC entered into a variable forward purchase agreement (the “Contract”) to deliver up to 17,584,098 shares of the Company’s Class A common stock at the exchange date, with the number of shares to be issued based on the trading price of the Company’s common stock during a 20-day observation period. On each of May 5, 2019, there were no material changes to15, 2023 and May 16, 2023, Buddy Chester Sub LLC settled its obligations under the Company’s advertisingContract and services purchase commitments and legal matters disclosed in Note 5delivered a total of the “Notes to Consolidated Financial Statements” included in the Prospectus.17,584,098 shares.
9
Interest Income (Expense), net
The Company generates interest income from its cash and Expense
cash equivalents and marketable securities and incurs interest expense from its borrowing facilities and finance leases. The following table provides additional information about the Company’s interest income (expense), net (in thousands):
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Interest income | $ | 11,050 | $ | 3,392 | $ | 29,752 | $ | 4,995 | |||||||||||||||
| Interest expense | (877) | (647) | (2,635) | (1,904) | |||||||||||||||||||
| Interest income, net | $ | 10,173 | $ | 2,745 | $ | 27,117 | $ | 3,091 | |||||||||||||||
Other Income (Expense), net
The Company’s other income (expense), net consists of changes in the fair value of equity warrants and investments, foreign currency transaction gains and losses, and allowances for credit losses. The following table provides additional information about the Company’s other income (expense), net (in thousands):
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Change in fair value of equity warrants | $ | (33,800) | $ | — | $ | (13,542) | $ | — | |||||||||||||||
| Change in fair value of equity investments | (33) | — | (47) | — | |||||||||||||||||||
| Foreign currency transaction losses | (289) | — | (179) | — | |||||||||||||||||||
| Other expense, net | $ | (34,122) | $ | — | $ | (13,768) | $ | — | |||||||||||||||
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU 2022-04—Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued this Accounting Standards Update (“ASU”) which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period. This update became effective at the beginning of the Company’s 2023 fiscal year. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. In November 2023, the FASB issued this ASU to update reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective beginning with the Company’s 2024 fiscal year annual reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
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 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.
10
| 13 Weeks Ended | |||||||
| May 5, 2019 | April 29, 2018 | ||||||
| Interest income | $ | 720 | $ | 10 | |||
| Interest expense | (4 | ) | — | ||||
| $ | 716 | $ | 10 | ||||
3. Acquisitions
Petabyte Acquisition
On June 18, 2019,October 23, 2022, the Company entered into a definitive Agreement and Plan of Merger (the “Petabyte Merger Agreement”) with Petabyte Technology Inc. (“Petabyte”), a Delaware corporation. Under the terms of the Petabyte Merger Agreement, the Company and Petabyte effected a merger on November 7, 2022, and Petabyte became a wholly-owned subsidiary of the Company. Headquartered in Bellevue, Washington, Petabyte is a provider of cloud-based technology solutions to the veterinary sector and the acquisition is expected to further strengthen the Company’s pet healthcare product and service offering.
The following table reconciles the estimated purchase price to the cash paid for the acquisition, net of cash acquired (in thousands):
| Estimated purchase price | $ | 43,281 | |||
| Less: cash acquired | 2,881 | ||||
| Cash paid for acquisition of business, net of cash acquired | $ | 40,400 | |||
The Petabyte transaction was accounted for as a business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the merger of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce.
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| Assets acquired: | |||||
| Cash and cash equivalents | $ | 2,881 | |||
| Accounts receivable | 104 | ||||
| Goodwill | 39,442 | ||||
| Identified intangible assets | 1,510 | ||||
| Other current and non-current assets | 318 | ||||
| Liabilities assumed: | |||||
| Other current and long-term liabilities | (974) | ||||
| Estimated purchase price | $ | 43,281 | |||
Pro forma information for the Petabyte acquisition has not been provided as the impact was not material to the Company’s consolidated results of operations.
Based on a preliminary allocation, in connection with this acquisition, the Company recorded goodwill of $39.4 million, none of which is anticipated to be deductible for tax purposes. The identified intangible assets consisted of $1.5 million of developed technology with an amortization period of 3.0 years.
11
4. Financial Instruments
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:
Level 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 assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Cash equivalents are carried at cost, which approximates fair value and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
Marketable securities are carried at fair value and are classified within Level 1 because they are valued using quoted market prices. Specific to marketable fixed income securities, the Company did not record any gross unrealized gains and losses as fair value approximates amortized cost. The Company did not record any credit lossesduring the thirteen and thirty-nine weeks ended October 29, 2023. Further, as of October 29, 2023, the Company did not record an allowance for credit losses related to its fixed income securities.
Equity investments in public companies that have readily determinable fair values are carried at fair value and are classified within Level 1 because they are valued using quoted market prices.
Equity warrants are classified within Level 3 of the fair value hierarchy as they are valued based on observable and unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. The Company utilized certain valuation techniques, such as the Black-Scholes option-pricing model and the Monte Carlo simulation model, to determine the fair value of equity warrants. The application of these models requires the use of a number of complex assumptions based on unobservable inputs, including the expected term, expected equity volatility, discounts for lack of marketability, cash flow projections, and probability with respect to vesting requirements.
The following table includes a summary of financial instruments measured at fair value as of October 29, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Cash | $ | 469,409 | $ | — | $ | — | |||||||||||||||||||||||
| Cash and cash equivalents | 469,409 | — | — | ||||||||||||||||||||||||||
| U.S. Treasury securities | 487,687 | — | — | ||||||||||||||||||||||||||
| Equity investments | 85 | — | — | ||||||||||||||||||||||||||
| Marketable securities | 487,772 | — | — | ||||||||||||||||||||||||||
| Equity warrants | — | — | 8,440 | ||||||||||||||||||||||||||
| Total financial instruments | $ | 957,181 | $ | — | $ | 8,440 | |||||||||||||||||||||||
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The following table includes a summary of financial instruments measured at fair value as of January 29, 2023 (in thousands):
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Cash | $ | 300,441 | $ | — | $ | — | ||||||||||||||
| Money market funds | 30,000 | — | — | |||||||||||||||||
| Cash and cash equivalents | 330,441 | — | — | |||||||||||||||||
| U.S. Treasury securities | 346,926 | — | — | |||||||||||||||||
| Equity investments | 18 | — | — | |||||||||||||||||
| Marketable securities | 346,944 | — | — | |||||||||||||||||
| Equity warrants | — | — | 31,622 | |||||||||||||||||
| Total financial instruments | $ | 677,385 | $ | — | $ | 31,622 | ||||||||||||||
The following table summarizes the change in fair value for financial instruments using unobservable Level 3 inputs (in thousands):
| 39 Weeks Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Beginning balance | $ | 31,622 | $ | — | |||||||
| Change in fair value of equity warrants | (23,182) | 44,962 | |||||||||
| Ending balance | $ | 8,440 | $ | 44,962 | |||||||
As of October 29, 2023 and January 29, 2023, the deferred credit subject to vesting requirements recognized within other long-term liabilities in exchange for the equity warrants was $34.9 million and $45.0 million, respectively.
The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the equity warrants as of October 29, 2023 (in thousands):
| Range | ||||||||||||||||||||||||||||||||||||||
| Fair Value | Valuation Techniques | Unobservable Input | Min | Max | Weighted Average | |||||||||||||||||||||||||||||||||
| Equity warrants | $8,440 | Black-Scholes and Monte Carlo | Probability of vesting | 0% | 99% | 78% | ||||||||||||||||||||||||||||||||
| Equity volatility | 35% | 80% | 76% | |||||||||||||||||||||||||||||||||||
5. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):
| As of | |||||||||||
| October 29, 2023 | January 29, 2023 | ||||||||||
| Furniture, fixtures and equipment | $ | 181,788 | $ | 162,296 | |||||||
| Computer equipment | 77,956 | 67,535 | |||||||||
| Internal-use software | 172,791 | 138,123 | |||||||||
| Leasehold improvements | 303,813 | 245,700 | |||||||||
| Construction in progress | 82,723 | 93,534 | |||||||||
| 819,071 | 707,188 | ||||||||||
| Less: accumulated depreciation and amortization | 304,370 | 228,450 | |||||||||
| Property and equipment, net | $ | 514,701 | $ | 478,738 | |||||||
13
Internal-use software includes labor and license costs associated with software development for internal use. As of October 29, 2023 and January 29, 2023, the Company had accumulated amortization related to internal-use software of $78.3 million and $56.5 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 October 29, 2023 and October 30, 2022, the Company recorded depreciation expense on property and equipment of $16.6 million and $16.1 million, respectively, and amortization expense related to internal-use software costs of $8.0 million and $6.1 million, respectively. For the thirty-nine weeks ended October 29, 2023 and October 30, 2022, the Company recorded depreciation expense on property and equipment of $57.5 million, and $42.1 million, respectively, and amortization expense related to internal-use software costs of $21.8 million and $16.0 million, respectively. The aforementioned depreciation and amortization expenses were included within selling, general and administrative expenses in the condensed consolidated statements of operations.
6. 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.
International Business Machines Corporation (“IBM”) previously alleged that the Company is infringing four 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 four asserted IBM patents. On April 19, 2021, IBM filed an answer with counterclaims seeking unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. On May 24, 2021, IBM filed an amended complaint 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 one of the five patents (the “‘414 patent”) being eliminated from the case.
The parties filed their motions for summary judgment which were fully briefed on February 24, 2022. On April 11, 2022, the District Court granted the Company’s motions for summary judgment that the Company did not infringe three 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 (the “Federal Circuit”) to appeal the District Court’s judgment of non-infringement of certain of the patents. Oral argument for the appeal occurred on October 4, 2023 and a decision by the Federal Circuit is pending. On May 3, 2023, IBM sent the Company a letter indicating that the ‘414 patent that was invalidated by the District Court was reexamined by the U.S. Patent & Trademark Office and a reexamination certificate was issued. As a result, IBM is asserting that the Company infringes the new five-yearclaims of the ‘414 patent. The Company continues to deny this recent allegation related to the ‘414 patent and all other allegations of any infringement and intends to vigorously defend itself in this matter.
7. Debt
ABL Credit Facility
The Company has a senior secured asset-backedasset-based credit facility (the “ABL Credit Facility”) which matures on August 27, 2026 and provides for non-amortizing revolving loans in an aggregate principal amount of up to $300$800 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$250 million,, subject to customary conditions.
14
The Company is also required to pay a pay commitment fee of between 0.25% and 0.375%per annum with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility.
8. Leases
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 three additional five-year terms. Fulfillment and customer service centers and corporate office leases including exercised renewal options, expire at various dates through 2031.2038, 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, 2019October 29, 2023 and January 29, 2023 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 | October 29, 2023 | January 29, 2023 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating | Operating lease right-of-use assets | $ | 473,529 | $ | 423,423 | |||||||||||||||
| Total operating lease assets | $ | 473,529 | $ | 423,423 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Accrued expenses and other current liabilities | $ | 28,425 | $ | 27,611 | |||||||||||||||
| Non-current | ||||||||||||||||||||
| Operating | Operating lease liabilities | 526,994 | 471,765 | |||||||||||||||||
| Total operating lease liabilities | $ | 555,419 | $ | 499,376 | ||||||||||||||||
| 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 thirty-nine weeks ended October 29, 2023 and October 30, 2022, assets acquired in exchange for new operating lease liabilities were $97.8 million and $90.3 million, respectively. Lease expense primarily relatedrelates to operating lease costs. Lease expense for the thirteen weeks ended May 5, 2019October 29, 2023 and October 30, 2022 was $11.0 million, of which short-term and variable lease payments were $2.2$25.5 million and were$23.7 million, respectively. Lease expense for the thirty-nine weeks ended October 29, 2023 and October 30, 2022 was $77.8 million and $68.3 million, respectively. The aforementioned lease expense was included within selling, general and administrative expenses in the condensed consolidated statements of operations.
9. Share-Based Compensation
| 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 | |
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Service and Performance-Based Awards
The Company granted restricted stock units which vested upon satisfaction of both service-based vesting conditions and company performance-based vesting conditions (“PRSUs”), subject to the employee’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 they occur.
Service and Performance-Based Awards Activity
The following table summarizes the activity related to the Company’s PRSUs for the thirty-nine weeks ended October 29, 2023 (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 29, 2023 | 2,206 | $ | 36.22 | ||||||||
| Granted | 232 | $ | 35.71 | ||||||||
| Vested | (1,904) | $ | 36.03 | ||||||||
| Forfeited | (193) | $ | 37.33 | ||||||||
| Unvested and outstanding as of October 29, 2023 | 341 | $ | 36.32 | ||||||||
The following table summarizes the weighted average grant-date fair value of PRSUs granted and total fair value of PRSUs vested for the periods presented:
| 39 Weeks Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Weighted average grant-date fair value of PRSUs | $ | 35.71 | $ | 43.59 | |||||||
| Total fair value of vested PRSUs (in millions) | $ | 74.1 | $ | 61.7 | |||||||
As of October 29, 2023, total unrecognized compensation expense related to unvested PRSUs was $7.5 million and is expected to be recognized over a weighted-average expected performance period of 2.1 years.
During the thirteenthirty-nine weeks ended May 5, 2019October 29, 2023 and April 29, 2018,October 30, 2022, vesting occurred for 93,309 PRSUs, respectively, that were 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 recognizedand PetSmart are controlled by affiliates of BC Partners.
The 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 employee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for RSUs on a straight-line basis over the requisite service period and accounted for forfeitures as they occur.
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Service-Based Awards Activity
The following table summarizes the activity related to the Company’s RSUs for the thirty-nine weeks ended October 29, 2023 (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 29, 2023 | 10,813 | $ | 45.56 | ||||||||
| Granted | 11,105 | $ | 34.25 | ||||||||
| Vested | (3,894) | $ | 46.01 | ||||||||
| Forfeited | (1,651) | $ | 40.75 | ||||||||
| Unvested and outstanding as of October 29, 2023 | 16,373 | $ | 38.27 | ||||||||
The following table summarizes the weighted average grant-date fair value of $7.2RSUs granted and total fair value of RSUs vested for the periods presented:
| 39 Weeks Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Weighted average grant-date fair value of RSUs | $ | 34.25 | $ | 41.44 | |||||||
| Total fair value of vested RSUs (in millions) | $ | 142.9 | $ | 34.3 | |||||||
As of October 29, 2023, total unrecognized compensation expense related to unvested RSUs was $513.5 million and $3.3is expected to be recognized over a weighted-average expected performance period of 2.7 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 October 29, 2023, there were 28.2 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):
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| PRSUs | $ | 954 | $ | 2,498 | $ | 732 | $ | 10,696 | |||||||||||||||
| RSUs | 63,394 | 43,032 | 178,165 | 99,005 | |||||||||||||||||||
| Total share-based compensation expense | $ | 64,348 | $ | 45,530 | $ | 178,897 | $ | 109,701 | |||||||||||||||
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 Company had a current income tax provision during the Company were a taxpayer separate from PetSmart.
thirteen and thirty-nine weeks ended October 29, 2023 of $1.7 million and $4.0 million, respectively. The Company did not have a current or deferred provision for income taxes for any taxing jurisdictionduring the thirteen and thirty-nine weeks endedMay 5, 2019 and April 29, 2018. October 30, 2022, respectively. Additionally, the Company maintained a full valuation allowance on its net deferred tax assets.
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Concurrent with its initial public offering during the IPO,fiscal year ended February 2, 2020, the Company, PetSmart, and PetSmartArgos Intermediate Holdco I Inc. (“Argos 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 thirty-nine weeks ended October 29, 2023, and October 30, 2022, the Company paid $10.3 million and $1.0 million, respectively, pursuant to the tax sharing agreement. The tax sharing agreement was effectively terminated for federal income taxes upon tax deconsolidation with PetSmart in February 2021. As of January 29, 2023, the Company had a payable related to the tax sharing agreement of $5.3 million which was settled as of October 29, 2023. The tax sharing agreement was subsequently terminated by all parties to the agreement on October 30, 2023, in connection with the transaction described in Note 1 - Description of Business.
On August 16, 2022, the U.S enacted the Inflation Reduction Act which introduced new tax provisions, including a 15% corporate alternative minimum tax, a 1% excise tax on corporate stock buybacks, and several tax incentives to promote clean energy. These tax provisions are effective for tax years beginning on or after December 31, 2022, and will not have a material impact on the Company’s condensed consolidated financial statements. 11. Earnings per Share |
Basic and diluted net lossearnings per share attributable to the Company’s common stockholders isare presented using the two classtwo-class method required for participating securities. Under the two classtwo-class method, net lossincome attributable to the Company’s 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 less distributed earnings.
Undistributed earnings are allocated proportionally to the Company’s 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 per share isare calculated by dividing net lossincome attributable to the Company’s 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.
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The following table sets forth basic and diluted net lossearnings per share attributable to the Company’s common stockholders for the periods presented (in thousands, except per share data):
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Basic and diluted earnings per share | |||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| (Loss) earnings attributable to common Class A and Class B stockholders | $ | (35,810) | $ | 2,311 | $ | 5,317 | $ | 43,128 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted-average common shares used in computing (loss) earnings per share: | |||||||||||||||||||||||
| Basic | 430,758 | 422,898 | 428,743 | 421,665 | |||||||||||||||||||
| Effect of dilutive stock-based awards | — | 5,227 | 2,663 | 5,558 | |||||||||||||||||||
| Diluted | 430,758 | 428,125 | 431,406 | 427,223 | |||||||||||||||||||
| Anti-dilutive stock-based awards excluded from diluted common shares | 16,781 | 6,008 | 10,868 | 5,069 | |||||||||||||||||||
| (Loss) earnings per share attributable to common Class A and Class B stockholders: | |||||||||||||||||||||||
| Basic | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
| Diluted | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
12. 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 | ) | |
Certain of the Company’s pharmacyhealthcare operations are currently, and have been since launch on July 2, 2018, conducted through Chewy Pharmacy KY, a Delaware limited liability company which was previously a wholly-owned subsidiary of PetSmart. ThePetSmart, for which the Company hasand Chewy Pharmacy KY entered into a services agreement, with PetSmart that provideswhich provided for the payment of a management fee to the Company due from PetSmart with respect to this arrangement.Chewy Pharmacy KY. The Company recognized $10.5$2.4 million and $6.9 million during the thirteen and thirty-nine weeks ended October 29, 2023, respectively, within net sales in the condensed consolidated statementstatements of operations for the services provided compared to $1.8 million and $4.9 million during the thirteen and thirty-nine weeks ended May 5, 2019.October 30, 2022, respectively. The services agreement will remain in place for so long asbetween the Company conducts any pharmacy operations through a PetSmart subsidiary.
As of October 29, 2023 and January 29, 2023, the Company had a net payable to PetSmart of $3.6 million and $4.9 million, respectively, which was released from its obligations under the Parent’s asset-backed revolving credit facilityincluded in accordance with its terms.
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 October 29, 2023 (“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 29, 2023 (“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/), filings with 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 1,600approximately 3,500 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 45,000approximately 110,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
Macroeconomic Considerations
The evolving macroeconomic conditions, including rising inflation and interest rates, have affected, and continue to affect, our business and consumer shopping behavior. We continue to monitor conditions closely and adapt aspects of our logistics, transportation, supply chain, and purchasing processes accordingly to meet the needs of our growing community of pets, pet parents and partners. As our customers react to these economic conditions, we will adapt our business accordingly to meet their evolving needs.
We are unable to predict the duration and ultimate impact of the evolving macroeconomic conditions on the broader economy or our operations and liquidity. As such, macroeconomic risks and uncertainties remain. 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 29, 2023.
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 2023 fiscal year generally consists of four 13-weekends on January 28, 2024 and is a 52-week year. Our 2022 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 29, 2023 and was a 52-week year.
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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 | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||
| 13 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, per share data, and percentages) | (in thousands, except net sales per active customer, per share data, and percentages) | October 29, 2023 | October 30, 2022 | % Change | October 29, 2023 | October 30, 2022 | % Change | ||||||||||||||||||||||||||||||||||||||
| Financial and Operating Data | Financial and Operating Data | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,108,872 | $ | 763,462 | 45.2 | % | Net sales | $ | 2,738,611 | $ | 2,532,122 | 8.2 | % | $ | 8,301,055 | $ | 7,391,460 | 12.3 | % | ||||||||||||||||||||||||||
| Net loss | $ | (29,554 | ) | $ | (59,815 | ) | 50.6 | % | |||||||||||||||||||||||||||||||||||||
Net (loss) income (1) | Net (loss) income (1) | $ | (35,810) | $ | 2,311 | n/m | $ | 5,317 | $ | 43,128 | (87.7) | % | |||||||||||||||||||||||||||||||||
| Net margin | Net margin | (1.3) | % | 0.1 | % | 0.1 | % | 0.6 | % | ||||||||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | (15,766 | ) | $ | (51,509 | ) | 69.4 | % | $ | 82,126 | $ | 70,399 | 16.7 | % | $ | 279,167 | $ | 213,970 | 30.5 | % | |||||||||||||||||||||||||
Adjusted EBITDA margin | (1.4 | )% | (6.7 | )% | 3.0 | % | 2.8 | % | 3.4 | % | 2.9 | % | |||||||||||||||||||||||||||||||||
| Net cash used in operating activities | $ | (51,141 | ) | $ | (45,273 | ) | (13.0 | )% | |||||||||||||||||||||||||||||||||||||
Free cash flow(1) | $ | (63,363 | ) | $ | (58,734 | ) | (7.9 | )% | |||||||||||||||||||||||||||||||||||||
Adjusted net income (2) | Adjusted net income (2) | $ | 63,011 | $ | 48,401 | 30.2 | % | $ | 213,576 | $ | 156,151 | 36.8 | % | ||||||||||||||||||||||||||||||||
(Loss) earnings per share, basic and diluted (1) | (Loss) earnings per share, basic and diluted (1) | $ | (0.08) | $ | 0.01 | n/m | $ | 0.01 | $ | 0.10 | (90.0) | % | |||||||||||||||||||||||||||||||||
Adjusted earnings per share, basic and diluted (2) | Adjusted earnings per share, basic and diluted (2) | $ | 0.15 | $ | 0.11 | 36.4 | % | $ | 0.50 | $ | 0.37 | 35.1 | % | ||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 80,208 | $ | 117,415 | (31.7) | % | $ | 387,356 | $ | 249,020 | 55.6 | % | ||||||||||||||||||||||||||||||||
Free cash flow (2) | Free cash flow (2) | $ | 48,523 | $ | 69,786 | (30.5) | % | $ | 276,458 | $ | 77,179 | 258.2 | % | ||||||||||||||||||||||||||||||||
| Active customers | 11,321 | 7,830 | 44.6 | % | Active customers | 20,266 | 20,524 | (1.3) | % | 20,266 | 20,524 | (1.3) | % | ||||||||||||||||||||||||||||||||
| Net sales per active customer | $ | 343 | $ | 314 | 9.2 | % | Net sales per active customer | $ | 543 | $ | 477 | 13.8 | % | $ | 543 | $ | 477 | 13.8 | % | ||||||||||||||||||||||||||
| Autoship customer sales | $ | 743,853 | $ | 477,449 | 55.8 | % | Autoship customer sales | $ | 2,093,077 | $ | 1,855,979 | 12.8 | % | $ | 6,270,985 | $ | 5,386,243 | 16.4 | % | ||||||||||||||||||||||||||
| Autoship customer sales as a percentage of net sales | 67.1 | % | 62.5 | % | Autoship customer sales as a percentage of net sales | 76.4 | % | 73.3 | % | 75.5 | % | 72.9 | % | ||||||||||||||||||||||||||||||||
(1) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures. | |||||||||||||||||||||||||||||||||||||||||||||
| n/m - not meaningful | n/m - not meaningful | ||||||||||||||||||||||||||||||||||||||||||||
(1) Includes share-based compensation expense and related taxes of $65.8 million and $187.9 million for the thirteen and thirty-nine weeks ended October 29, 2023, compared to $46.1 million and $113.0 million for the thirteen and thirty-nine weeks ended October 30, 2022. | (1) Includes share-based compensation expense and related taxes of $65.8 million and $187.9 million for the thirteen and thirty-nine weeks ended October 29, 2023, compared to $46.1 million and $113.0 million for the thirteen and thirty-nine weeks ended October 30, 2022. | ||||||||||||||||||||||||||||||||||||||||||||
(2) Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP financial measures. | (2) Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP financial measures. | ||||||||||||||||||||||||||||||||||||||||||||
We define net margin as net (loss) income 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; changes in the fair value of equity warrants; exit 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.
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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; changes in the fair value of equity warrants; exit 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 changes in the fair value of equity warrants, exit costs, 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 loss(loss) income 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 | 39 Weeks Ended | |||||||||||||||||||||
| Reconciliation of Net (Loss) Income to Adjusted EBITDA | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||
| Net (loss) income | $ | (35,810) | $ | 2,311 | $ | 5,317 | $ | 43,128 | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Depreciation and amortization | 25,523 | 23,018 | 82,195 | 60,696 | |||||||||||||||||||
| Share-based compensation expense and related taxes | 65,799 | 46,090 | 187,878 | 113,023 | |||||||||||||||||||
| Interest income, net | (10,173) | (2,745) | (27,117) | (3,091) | |||||||||||||||||||
| Change in fair value of equity warrants | 33,800 | — | 13,542 | — | |||||||||||||||||||
| Income tax provision | 1,704 | — | 4,011 | — | |||||||||||||||||||
| Exit costs | (778) | — | 6,839 | — | |||||||||||||||||||
| Transaction related costs | 1,041 | 706 | 3,167 | 2,101 | |||||||||||||||||||
| Other | 1,020 | 1,019 | 3,335 | (1,887) | |||||||||||||||||||
| Adjusted EBITDA | $ | 82,126 | $ | 70,399 | $ | 279,167 | $ | 213,970 | |||||||||||||||
| Net sales | $ | 2,738,611 | $ | 2,532,122 | $ | 8,301,055 | $ | 7,391,460 | |||||||||||||||
| Net margin | (1.3) | % | 0.1 | % | 0.1 | % | 0.6 | % | |||||||||||||||
| Adjusted EBITDA margin | 3.0 | % | 2.8 | % | 3.4 | % | 2.9 | % | |||||||||||||||
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| ($ 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. | |||||||
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this 10-Q Report adjusted net income and adjusted basic and diluted earnings per share, which represent non-GAAP financial measures. We calculate adjusted net income as net income (loss) excluding share-based compensation expense and related taxes, changes in the fair value of equity warrants, and exit costs. We calculate adjusted basic and diluted earnings per share by dividing adjusted net income (loss) attributable to common stockholders by the weighted-average shares outstanding during the period. We have provided a reconciliation below of adjusted net income to net income (loss), the most directly comparable GAAP financial measure.
We definehave included adjusted EBITDA marginnet income and adjusted basic and diluted earnings per share in this 10-Q Report because each 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 net income and adjusted basic and diluted earnings per share facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable gains and losses that do not represent a component of our core business operations. We believe it is useful to exclude non-cash share-based compensation expense 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 exit costs and the changes in the fair value of equity warrants, because exit costs and the variability of equity warrant gains and losses are not representative of our underlying operations. Accordingly, we believe that these measures 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.
Adjusted net income and adjusted EBITDA divided bybasic and diluted earnings per share have limitations as financial measures and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Other companies may calculate adjusted net sales.income and adjusted basic and diluted earnings per share differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider adjusted net income and adjusted basic and diluted earnings alongside other financial performance measures, including various cash flow metrics, net income (loss), basic and diluted earnings (loss) per share, and our other GAAP results.
23
The following table presents a reconciliation of net (loss) income to adjusted net income, as well as the calculation of adjusted basic and diluted earnings per share, for each of the periods indicated.
| (in thousands, except per share data) | 13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||
| Reconciliation of Net (Loss) Income to Adjusted Net Income | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||
| Net (loss) income | $ | (35,810) | $ | 2,311 | $ | 5,317 | $ | 43,128 | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Share-based compensation expense and related taxes | 65,799 | 46,090 | 187,878 | 113,023 | |||||||||||||||||||
| Change in fair value of equity warrants | 33,800 | — | 13,542 | — | |||||||||||||||||||
| Exit costs | (778) | — | 6,839 | — | |||||||||||||||||||
| Adjusted net income | $ | 63,011 | $ | 48,401 | $ | 213,576 | $ | 156,151 | |||||||||||||||
| Weighted-average common shares used in computing (loss) earnings per share and adjusted earnings per share: | |||||||||||||||||||||||
| Basic | 430,758 | 422,898 | 428,743 | 421,665 | |||||||||||||||||||
Effect of dilutive share-based awards (1) | 1,414 | 5,227 | 2,663 | 5,558 | |||||||||||||||||||
Diluted (1) | 432,172 | 428,125 | 431,406 | 427,223 | |||||||||||||||||||
| (Loss) earnings per share attributable to common Class A and Class B stockholders | |||||||||||||||||||||||
| Basic | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
Diluted (1) | $ | (0.08) | $ | 0.01 | $ | 0.01 | $ | 0.10 | |||||||||||||||
| Adjusted basic | $ | 0.15 | $ | 0.11 | $ | 0.50 | $ | 0.37 | |||||||||||||||
Adjusted diluted (1) | $ | 0.15 | $ | 0.11 | $ | 0.50 | $ | 0.37 | |||||||||||||||
(1) For the thirteen weeks ended October 29, 2023, our calculation of adjusted diluted earnings per share attributable to common Class A and Class B stockholders requires an adjustment to the weighted-average common shares used in the calculation to include the weighted-average dilutive effect of share-based awards. | |||||||||||||||||||||||
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.
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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 | 39 Weeks Ended | |||||||||||||||||||||
| Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 80,208 | $ | 117,415 | $ | 387,356 | $ | 249,020 | |||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Capital expenditures | (31,685) | (47,629) | (110,898) | (171,841) | |||||||||||||||||||
| Free Cash Flow | $ | 48,523 | $ | 69,786 | $ | 276,458 | $ | 77,179 | |||||||||||||||
| ($ 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 asand 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.
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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), Netnet
Other Income (Expense), net
Our other income (expense), net consists primarily of interest earned on cashchanges in the fair value of equity warrants 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-backedinvestments, foreign currency transaction gains and losses, and allowances for credit facility (the “ABL Credit Facility”). See “Other Liquidity Measures-ABL Credit Facility.”losses.
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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 | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of net sales | % of net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | October 29, 2023 | October 30, 2022 | % Change | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | % Change | October 29, 2023 | October 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,738,611 | $ | 2,532,122 | 8.2 | % | 100.0 | % | 100.0 | % | $ | 8,301,055 | $ | 7,391,460 | 12.3 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of goods sold | 1,957,850 | 1,811,945 | 8.1 | % | 71.5 | % | 71.6 | % | 5,942,066 | 5,320,666 | 11.7 | % | 71.6 | % | 72.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 780,761 | 720,177 | 8.4 | % | 28.5 | % | 28.4 | % | 2,358,989 | 2,070,794 | 13.9 | % | 28.4 | % | 28.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 611,718 | 543,532 | 12.5 | % | 22.3 | % | 21.5 | % | 1,814,586 | 1,564,798 | 16.0 | % | 21.9 | % | 21.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising and marketing | 179,200 | 177,079 | 1.2 | % | 6.5 | % | 7.0 | % | 548,424 | 465,959 | 17.7 | % | 6.6 | % | 6.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 790,918 | 720,611 | 9.8 | % | 28.9 | % | 28.5 | % | 2,363,010 | 2,030,757 | 16.4 | % | 28.5 | % | 27.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income from operations | (10,157) | (434) | n/m | (0.4) | % | — | % | (4,021) | 40,037 | 110.0 | % | — | % | 0.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income, net | 10,173 | 2,745 | n/m | 0.4 | % | 0.1 | % | 27,117 | 3,091 | n/m | 0.3 | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | (34,122) | — | n/m | (1.2) | % | — | % | (13,768) | — | n/m | (0.2) | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Loss) income before income tax provision | (34,106) | 2,311 | n/m | (1.2) | % | 0.1 | % | 9,328 | 43,128 | (78.4) | % | 0.1 | % | 0.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision | 1,704 | — | n/m | 0.1 | % | — | % | 4,011 | — | n/m | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (35,810) | $ | 2,311 | n/m | (1.3) | % | 0.1 | % | $ | 5,317 | $ | 43,128 | (87.7) | % | 0.1 | % | 0.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| n/m - not meaningful | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 13 Weeks Ended | |||||||
| ($ in thousands) | May 5, 2019 | April 29, 2018 | |||||
| Consolidated Statements of Operations | |||||||
| 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 | ) | |
| 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 Thirty-Nine Weeks Ended May 5, 2019October 29, 2023 Compared to Thirteen and Thirty-Nine Weeks Ended April 29, 2018October 30, 2022
Net Sales
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | October 29, 2023 | October 30, 2022 | $ Change | % Change | October 29, 2023 | October 30, 2022 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Consumables | $ | 1,984,688 | $ | 1,804,126 | $ | 180,562 | 10.0 | % | $ | 5,993,689 | $ | 5,215,097 | $ | 778,592 | 14.9 | % | |||||||||||||||||||||||||||||||
| Hardgoods | 285,028 | 291,569 | (6,541) | (2.2) | % | 893,301 | 898,397 | (5,096) | (0.6) | % | |||||||||||||||||||||||||||||||||||||
| Other | 468,895 | 436,427 | 32,468 | 7.4 | % | 1,414,065 | 1,277,966 | 136,099 | 10.6 | % | |||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,738,611 | $ | 2,532,122 | $ | 206,489 | 8.2 | % | $ | 8,301,055 | $ | 7,391,460 | $ | 909,595 | 12.3 | % | |||||||||||||||||||||||||||||||
| 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, 2019October 29, 2023 increased by $345.4$206.5 million, or 45.2%8.2%, to $1.1$2.7 billion compared to $763.5 million$2.5 billion for the thirteen weeks ended April 29, 2018.October 30, 2022. This increase was primarily due todriven by growth in customer spending from both new and existing customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program. Net sales per active customer base, with the number of active customers increasing by 3.5 million,increased $66, or 44.6%13.8%, in the thirteen weeks ended May 5, 2019October 29, 2023 compared to the thirteen weeks ended AprilOctober 30, 2022, driven by growth across our healthcare and consumables businesses.
Net sales for the thirty-nine weeks ended October 29, 2018, along2023 increased by $909.6 million, or 12.3%, to $8.3 billion compared to $7.4 billion for the thirty-nine weeks ended October 30, 2022. This increase was primarily driven by growth in customer spending from both new and existing customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program. Net sales per active customer increased $66, or 13.8%, in the increased spending amongthirty-nine weeks ended October 29, 2023 compared to the thirty-nine weeks ended October 30, 2022, driven by growth across our active customers.consumables and healthcare businesses.
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Cost of Goods Sold and Gross Profit
| 13 Weeks Ended | ||||||||||||||
| ($ 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, 2019October 29, 2023 increased by $241.5$145.9 million, or 39.4%8.1%, to $855.0 million$2.0 billion compared to $613.5 million$1.8 billion in the thirteen weeks ended April 29, 2018.October 30, 2022. This increase was primarily due to a 42.1%an increase in orders shipped and 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 supply chain efficiency gains across our fulfillment network.
Cost of goods sold for the thirty-nine weeks ended October 29, 2023 increased by $621.4 million, or 11.7%, to $5.9 billion compared to $5.3 billion in the thirty-nine weeks ended October 30, 2022. This increase was primarily asdue to an increase in associated product, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in net sales on a result of negotiated cost reductions from product and freight suppliers.percentage basis, reflecting supply chain efficiency gains across our fulfillment network.
Gross profit for the thirteen weeks ended May 5, 2019October 29, 2023 increased by $103.9$60.6 million, or 69.3%8.4%, to $253.9$780.8 million compared to $150.0$720.2 million in the thirteen weeks ended April 29, 2018.October 30, 2022. 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, 2019October 29, 2023 increased by 33010 basis points compared to the thirteen weeks ended AprilOctober 30, 2022, primarily due to margin expansion across our healthcare, hardgoods and private brands businesses.
Gross profit for the thirty-nine weeks ended October 29, 2018,2023 increased by $288.2 million, or 13.9%, to $2.4 billion compared to $2.1 billion in the thirty-nine weeks ended October 30, 2022. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a resultpercentage of negotiated cost reductions from productnet sales for the thirty-nine weeks ended October 29, 2023 increased by 40 basis points compared to the thirty-nine weeks ended October 30, 2022, primarily due to margin expansion across our healthcare, hardgoods, and freight suppliers.private brands businesses.
Selling, General and Administrative
| 13 Weeks Ended | ||||||||||||||
| ($ 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, 2019October 29, 2023 increased by $58.7$68.2 million, or 47.7%12.5%, to $181.9$611.7 million compared to $123.2$543.5 million in the thirteen weeks ended April 29, 2018.October 30, 2022. This increase was primarily due to an increase of $32.5$27.7 million in facilities expenses and other general and administrative expenses, principally due to business growth and new initiatives as well as the expansion of operations at corporate offices in Plantation, Florida, and Seattle, Washington. This also included an increase of $20.7 million in fulfillment costs largely attributable to increased investments to support the overall growth of our business, including the openingcosts associated with the launch of a new fulfillment centeroperations in Canada and the expansionopening and operating of customer service headcountfulfillment centers in Reno, Nevada and launchNashville, Tennessee, as well as an increase of a new customer service center$19.8 million in non-cash share-based compensation expense and related taxes.
Selling, general and administrative expenses for the thirty-nine weeks ended October 29, 2023 increased by $249.8 million, or 16.0%, to $1.8 billion compared to $1.6 billion in the second quarter of 2018. We also expanded our corporate office and increased headcount in IT, merchandising, and other corporate departments as a result of business growth and also in contemplation of becoming a public company, resulting inthirty-nine weeks ended October 30, 2022. This was primarily due to an increase of $116.2 million in compensation and facilities expenseexpenses and other general and administrative itemsexpenses, principally due to business growth and new initiatives as well as the expansion of $26.2 million.operations at corporate offices in Plantation, Florida, and Seattle, Washington. This also included an increase of $74.9 million in non-cash share-based compensation expense and related taxes as well as an increase of $58.7 million in fulfillment costs largely attributable to investments to support the overall growth of our business, including the costs associated with the opening and operating of fulfillment centers in Reno, Nevada and Nashville, Tennessee.
Advertising and Marketing
| 13 Weeks Ended | ||||||||||||||
| ($ 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, 2019October 29, 2023 increased by $15.6$2.1 million, or 18.0%1.2%, to $102.3$179.2 million compared to $86.7$177.1 million in the thirteen weeks ended AprilOctober 30, 2022. Our marketing expenses increased due to additional investment in our upper funnel marketing channels as well as expansion into new channels, contributing to new customer acquisition and an increase in wallet share from our large and stable customer base.
Advertising and marketing expenses for the thirty-nine weeks ended October 29, 2018, but overall spend declined2023 increased by $82.4 million, or 17.7%, to $548.4 million compared to $466.0 million in the thirty-nine weeks ended October 30, 2022. Our marketing expenses increased due to additional investment in our upper funnel marketing channels as a percentagewell as expansion into new channels, contributing to new customer acquisition and an increase in wallet share from our large and stable customer base.
Interest Income (Expense), net
Interest income for the thirteen weeks ended October 29, 2023 increased by $7.4 million, to $10.2 million compared to interest income of net sales to 9.2% from 11.4%$2.8 million in the thirteen weeks ended April 29, 2018. ThereOctober 30, 2022. This increase was a $14.2 million increase in advertisingdue to interest income generated by cash and marketing spending through existing channels in the thirteen weeks ended May 5, 2019 which contributed to an increase in the number of active customers by 3.5 million.
cash equivalents and marketable securities exceeding interest expenses incurred.
28
| 13 Weeks Ended | ||||||||||||||
| ($ 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 for the thirty-nine weeks ended October 29, 2023 increased by $24.0 million, to $27.1 million compared to interest income of $3.1 million in the thirty-nine weeks ended October 30, 2022. This increase was due to interest income generated by cash and cash equivalents and marketable securities exceeding interest expenses incurred.
Other Income (Expense), net
Other expense for the thirteen weeks ended May 5, 2019 increased $0.7October 29, 2023 was $34.1 million compared toand consisted of changes in the thirteenfair value of equity warrants and investments as well as foreign currency transaction losses.
Other expense for the thirty-nine weeks ended AprilOctober 29, 2018. This increase2023 was primarily due to intercompany interest income on net amounts due from Parent.$13.8 million and consisted of changes in the fair value of equity warrants and investments as well as foreign currency transaction losses.
Liquidity and Capital Resources
We believe that our cash and cash equivalents, marketable securities, 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
| 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 | |||
| 39 Weeks Ended | |||||||||||
| ($ in thousands) | October 29, 2023 | October 30, 2022 | |||||||||
| Net cash provided by operating activities | $ | 387,356 | $ | 249,020 | |||||||
| Net cash used in investing activities | $ | (237,454) | $ | (469,865) | |||||||
| Net cash used in financing activities | $ | (10,934) | $ | (4,007) | |||||||
Operating Activities
Net cash used inprovided by operating activities was $51.1$387.4 million for the thirteenthirty-nine weeks ended May 5, 2019 ,October 29, 2023, which primarily consistingconsisted of $29.6$5.3 million of net loss, adjusted for certainincome, non-cash items, which primarily includedadjustments such as depreciation and amortization expense of $6.9$82.2 million and $7.2 million of share-based compensation expense as well asof $178.9 million, and a $41.1cash increase of $93.6 million increase in cash consumed byfrom working capital. Cash increases from working capital were primarily driven by higheran increase in other current liabilities and payables, partially offset by an increase in inventories, accounts receivable, prepaid expensesreceivables, and other current assets,assets.
Net cash provided by operating activities was $249.0 million for the thirty-nine weeks ended October 30, 2022, which primarily consisted of $43.1 million of net income, non-cash adjustments such as depreciation and lower accrued expensesamortization expense of $60.7 million and share-based compensation expense of $109.7 million, and a cash increase of $22.5 million from working capital. Cash increases from working capital were primarily driven by an increase in payables and other current liabilities, partially offset by higher accounts payable.
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Investing Activities
Net cash used in investing activities was $8.2$237.5 million for the thirteenthirty-nine weeks ended May 5, 2019 ,October 29, 2023, primarily consisting of $12.2$126.2 million for the purchase of marketable securities, net of maturities and $110.9 million for 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$469.9 million for the thirteenthirty-nine weeks ended April 29, 2018,October 30, 2022, primarily consisting of $13.5$296.6 million for the purchase of costsmarketable securities and $171.8 million for capital 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, partially offset by $10.0 million of cash reimbursements, net of advances from PetSmart.software.
Financing Activities
Net cash provided byused in financing activities was $0.3$10.9 million for the thirteenthirty-nine weeks ended May 5, 2019October 29, 2023 and April 29, 2018, primarily consistingconsisted of a $0.3payments made pursuant to the tax sharing agreement with related parties, principal repayments of finance lease obligations, and payment of debt modification costs.
Net cash used in financing activities was $4.0 million management fee expense allocatedfor the thirty-nine weeks ended October 30, 2022, and consisted of $2.5 million for payments of tax withholdings related to us by PetSmart for organizational oversightvesting of share-based compensation awards, payments made pursuant to the tax sharing agreement with related parties, and certain limited corporate functions.principal repayments of finance lease obligations.
Other Liquidity Measures
ABL Credit Facility
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.10-Q Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
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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.October 29, 2023.
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 .October 29, 2023.
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
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our prospectus, dated June 13, 2019 and filed withAnnual Report on Form 10-K for the SEC on June 17, 2019 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.fiscal year ended January 29, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5. Other Information
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Item 6. Exhibits
| Incorporation by Reference | ||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith | ||||||||||||||
| 2.1 | 8-K | 001-38936 | 2.1 | October 30, 2023 | ||||||||||||||||
| 10.1 | 8-K | 001-38936 | 10.1 | October 30, 2023 | ||||||||||||||||
| 10.2 | X | |||||||||||||||||||
| 10.3 | 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 | ||||||||||||||||||||
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| 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. | |||||||||||
| Date: | December 6, 2023 | By: | |||||||||
| Interim Chief Financial Officer and Chief Accounting Officer | |||||||||||
| (Principal Financial Officer and Principal Accounting Officer) | |||||||||||
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