Good day, and welcome to the Chewy third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Robert LaFleur, Vice President of Investor Relations. Please go ahead. Thank you for joining us on the call today to discuss our third quarter 2021 results. Joining me today are Chewy CEO, Sumit Singh, and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC earlier today, have been posted to the investor relations section of our website, investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strategies, investments, industry trends, and our ability to successfully respond to business risks, including those related to the spread of COVID-19. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. For further information, please refer to the risk factors and other information in Chewy's 10-Q and 8-K filed earlier today and in our other filings with the SEC. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided on our investor relations website and in today's SEC filings. These non-GAAP measures are not intended as substitutes for GAAP results. Additionally, unless otherwise noted, results discussed today refer to third quarter 2021, and all comparisons are accordingly against the third quarter of 2020. Finally, this call in its entirety is being webcast on our investor relations website. A replay of this call will also be available on our IR website shortly. I'd now like to turn the call over to Sumit. Thanks, Rob, and thanks to all of you for joining us on the call. Demand and customer engagement remained strong throughout the third quarter. Q3 net sales were $2.21 billion, adding 24% growth on top of strong comps last year. These top-line results and our continued growth this year demonstrate the durability of our business model and the overall strength of the pet category. Our metrics measuring demand and customer engagement, such as site traffic, new customer acquisition, order volume, order size, purchase frequency, and net sales per active customer or NSPAC, were strong throughout the quarter. We ended Q3 with 20.4 million customers, a year-over-year increase of 15%. Consistent with the trends we have seen throughout 2021, gross customer adds continue to exceed pre-pandemic levels, and retention rates continue to track in line with historical levels. More importantly, the strength and quality of our new and active customers continues to improve. For example, we estimate that the expected lifetime values of the Q3 2021 new customer cohort is 12% higher than their pre-pandemic counterpart. Additionally, third quarter ordership customer sales as a percent of net sales increased 140 basis points to 70.6%, reaching a new company high. Last but not least, the average order value for new to Chewy customers was 6% and 13% higher than the Q3 2020 and Q3 2019 cohorts, respectively. These positive new customer behaviors flow through to NSPAC, which is an important gauge of overall customer engagement and lifetime customer contribution. Here, we are pleased to share that the third quarter NSPAC increased 15% to $419. This reflects year-over-year growth of $56, which is a record increase for us. It is exciting for us to see NSPAC growth accelerate as the large 2020 cohort matures and our expanded customer choices and increased discoverability expedite share of wallet gains. Even with these gains, we are still only capturing a fraction of the average U.S. pet spend per household from the over 20 million loyal customers who deem Chewy their preferred destination for everything pet. Further expanding NSPAC is an important piece of our growth and profitability flywheel. We are encouraged to see our efforts bear fruit in this area, and at the same time, we are highly motivated and remain focused on driving additional NSPAC growth. Moving on to gross margins. Third quarter gross margin expanded 90 basis points year- over- year to 26.4%. This is something we're proud of achieving when operating in the present challenging environment. As we executed Q3, we observed two factors that affected gross margin that had been largely absent through the first half of the year. Elevated inbound freight costs and product cost inflation. Together, these two factors, net of a favorable mix shift and pricing adjustment, muted gross margin expansion in the quarter by approximately 100 basis points. The elevated inbound freight costs reflect macro trends that are impacting imports and the flow of shipments across the country. We believe these costs will remain elevated in the near term until the global supply chain disruptions begin to abate. On product costs, we saw inflation ramp up on an expanded assortment of inventory items throughout the quarter. In consumables-led categories, many large national brand suppliers have raised MAP to pass through the higher product costs, and we are adjusting our prices accordingly. In hard goods-led categories, which are typically not governed by MAP pricing, we have seen a greater delta between cost and price, which is primarily driven by higher demand elasticity of products in these categories. Given the inherent price transparency across online channels, this lag between higher cost inputs and the eventual rationalization of consumer-facing prices creates a short-term drag on profitability. Over time, we expect increased prices will offset higher product costs and negate any long-term negative impact to gross margin without impacting customer demand. On the advertising and marketing front, we reversed the sequential spike that we saw last quarter and delivered higher marketing efficiency, even as customer acquisitions remained steady and net packs ramped nicely. Q3 marketing expenses scaled to 6.8% of net sales. The drivers of improved efficiency in Q3 are a combination of ad costs correcting from their Q2 high and sharper, more targeted execution from our team across channels and across customer segments. Our efforts, which included predictive propensity modeling while taking macro conditions into account, proved effective in aligning customer segments and maximizing acquisition LTV. The results of this approach were twofold. First, we saw a strengthening of traffic or sessions to our website, which we converted at a higher rate, both sequentially and year-over-year. Second, we also improved efficiency across various channels and reduced CPA in the quarter by 12% sequentially. Moving on to SG&A, the higher labor costs and related costs we saw in SG&A during Q3 essentially offset our gross margin improvement and marketing efficiencies, leading to Q3 adjusted EBITDA margin that was flat compared to last year. Shifting gears from in-quarter performance to innovations across Chewy, I'd like to share some of the latest developments in our growing Chewy Health franchise. First, I'm pleased to announce that we have expanded access to our popular Connect with a Vet telehealth service to our entire base of 20 million active customers, plus any new to Chewy customers on a pay-per-consult basis across chat and video. Access for Autoship customers remains free of charge, and now non-Autoship customers can also enjoy the peace of mind that comes from having nationwide access to professional veterinarian care 15 hours a day, 365 days a year. Continuing our innovation streak in Chewy Health, we recently announced that we will offer an exclusive suite of pet health insurance and wellness and preventative plans in partnership with Trupanion starting in spring 2022. Since its inception, the mission of Chewy Health has been making pet healthcare more accessible and affordable, and these insurance and wellness plans were designed to do both. In designing them, we wanted to give pet parents the peace of mind to always say yes when it comes to taking the best possible care of their pets. We will share more details on future earnings calls. Finally, in Chewy Health, our rollout of Practice Hub is continuing to generate buzz and interest in the industry. As a reminder, with Practice Hub, we have designed a complete e-commerce solution for veterinarians that can be integrated with their existing practice management software. Using our proprietary app, vets can easily create, pre-approve, and manage RX and vet diet prescriptions, all in one place. They can earn revenue as a seller on our marketplace when customers place an order in clinic or purchase their items at home on chewy.com, with Chewy handling all of inventory, fulfillment, shipping, and customer service. Our managed initial rollout of Practice Hub continues, with over 50 clinics participating on an invitation-only basis. We continue to receive positive feedback from veterinarians and staff using the product. We have a healthy pipeline of hundreds of interested users, ranging from independently operated practices to multi-clinic veterinary groups. We are excited about the initial success of Practice Hub and look forward to expanding the rollout to the broader vet community. When evaluating the potential contribution of Chewy Health to our long-term objectives and within the $35 billion pet health TAM, it is worth emphasizing that presently less than 15% of Chewy customers are Chewy Health customers. The opportunity within our base of 20 million customers is meaningful, not to mention the opportunity from pet parents who are not yet Chewy customers. Integrating new healthcare services like insurance, wellness plans, Connect with a Vet, and Practice Hub with our existing pharmacy operations, where we have nearly tripled our run rate pharmacy revenue over the short 10-quarter period since our IPO, will help us drive deeper penetration into this vertical with our customers and vet partners. I'd also like to take a moment to reiterate that we continue to manage Chewy for the long term by looking beyond the near-term noise in the macro environment today, and instead by sticking to the strategic roadmap, which has been Chewy's North Star since our IPO. Key components of that roadmap include customer lifecycle management, which includes both acquiring customers and expanding their share of wallet. It also includes growing our private label brands and expanding our healthcare offerings. Since 2018, we've nearly doubled our customer base and increased NSPAC by 30%. Our private label catalog has more than quadrupled, and its penetration in the hard goods business has increased to nearly 20%. Additionally, I just outlined the progress we are making in Chewy Health with our B2C and B2B offerings to customers and veterinarians. Overall, when evaluating Chewy's progress from a customer's lens, we now offer a rapidly growing multidimensional customer experience that spans consumables, hard goods, private label brands, and an emerging full ecosystem of health offerings. This makes our customers stickier and gives them an opportunity to strengthen their engagement and spend with us. Finally, while we have not made any announcements yet on our last two roadmap components, non-vet services and international expansion, both remain questions of when and not if. Looking back, we have accomplished a lot and have much to be proud of. Looking forward, tremendous opportunity still lies ahead, and in so many ways, we are just getting started. With that, I will wrap up by reiterating that we are pleased with our Q3 performance and our ability to deliver strong results in the face of disruptions and challenging macro conditions. Looking beyond these near-term challenges, there is plenty of reason for optimism. Consumer engagement is high, business momentum is strong, and we believe the long-term positive trends of more pet ownership, higher per pet spending, and increased e-commerce penetration are as strong as ever. Amidst this, our ability to retain the significant revenue gains we recorded last year during the height of the pandemic, and then adding meaningful growth on top of that this year, clearly reflects the soundness of our long-term strategy and our efforts to build an enduring franchise to serve millions of loyal pets and pet parents. In short, we are bullish about Chewy's future. With that, I'll turn the call over to Mario. Mario? Thank you, Sumit. Our third quarter net sales were $2.21 billion, representing 24.1% growth. On a two-year stack basis, year-to-date net sales through the third quarter grew by more than $3 billion or 80% versus the same period in 2019. As Sumit mentioned in his remarks, demand remained strong throughout the quarter, while inflationary pressures, product shortages, and labor constraints made execution challenging. Shortages of wet dog food persisted, while out-of-stock levels in areas like third-party and proprietary branded hard goods also increased. As a result of these, the negative impact of supply shortages in Q3 net sales was approximately $15 million more than our internal expectations. Third quarter Autoship customer sales increased 26.7% to $1.56 billion, faster than overall net sales growth and up 80% on a two-year stack basis. Third quarter Autoship customer sales as a percentage of net sales increased 140 basis points to 70.6%. This improvement in Autoship penetration rate reflects maturation of the 2020 customer cohort and Autoship's unmatched value proposition, including free access to Connect with a Vet. Third quarter net sales per active customer, or NSPAC, increased $56 or 15.4% to $419. On an absolute dollar and percentage basis, the year-over-year NSPAC improvements were the largest in the company's history. We expect NSPAC growth to remain strong for the balance of 2021 as we continue to successfully grow customer share of wallet across all cohorts. Our strong NSPAC performance is a clear indication of the health of the underlying customer demand that continues to drive our top-line results. We had 20.4 million active customers at the end of Q3, an increase of 14.7% year-o ver- year. As a reminder, net customer adds are a function of new customers added in the period and the retention of customers acquired in prior periods. Consistent with our year-to-date trends, our gross customer adds continued to run above the pre-pandemic levels of 2019 and below the elevated levels we saw in 2020 during the peak of the pandemic and quarantine. Retention rates for customers heading from their first year into their second year remain within their historic range, as do retention rates for our more mature cohorts. Moving down the income statement, third quarter gross margin increased 90 basis points to 26.4%. Our ability to expand gross margin 90 basis points against a backdrop of higher inbound freight costs and accelerating product cost inflation reflects our ability to navigate a challenging operating environment while still making solid progress towards our long-term targets, protecting customer experience, and remaining competitive in the market. On the SG&A front, we entered Q3 expected to see improvement in labor markets. That has not materialized to the extent we expected, and labor shortages continue to hinder our efforts to fully staff our fulfillment centers. This affects our ability to process both inbound and outbound shipments and achieve optimal levels of operational productivity. In the face of these macro-driven challenges, we spent more to maintain customer experience and business continuity, which was a drag on Q3 profitability. Third quarter operating expenses, which include SG&A and advertising and marketing, were $616.8 million or 27.9% of net sales, compared to 27.3% in third quarter of 2020. The 60 basis points of OpEx deleveraging reflects significant labor cost pressure in SG&A, offset by positive operating leverage in advertising and marketing. Let's go through the OpEx details. SG&A, which includes all fulfillment and customer service costs, credit card processing fees, corporate overhead, and share-based compensation, totaled $466.4 million in the third quarter or 21.1% of net sales, compared to 19.8% in the third quarter of 2020. Excluding share-based compensation, SG&A totaled $447.3 million or 20.2% of net sales, an increase of 180 basis points versus the third quarter of 2020. This deleveraging of SG&A, net of share-based compensation, is largely driven by ongoing increases in labor costs. As has been widely reported across the country, demand for labor continues to outpace supply, and as a result, labor costs have yet to stabilize. In the face of these ongoing labor shortages, we spent an incremental $30 million on higher wages, benefits, recruiting, and hiring incentives in the third quarter, which was in line with the expectations we laid out in our previous earnings call. Q3 SG&A expenses also included approximately $10 million in cloud computing and software costs related to our build-out efforts as we upgrade our technology infrastructure to meet the needs of growing customer demand and increase work from home capabilities. These investments provide us with a solid tech platform on which to grow the business, which over time allows us to focus more of our CapEx on building out our fulfillment capacity. Net of the $40 million attributable to incremental labor costs and the computing and remote work infrastructure expenses, which would not have been in SG&A expenses last year, Q3 SG&A, excluding share-based compensation, would represent 18.4% of net sales, which is flat compared to Q3 last year. As we have shared previously, our ability to scale costs in our existing network and corporate functions enable us to fund new initiatives, technology, and incremental fulfillment capacity. Over time, we expect the deployment of automation combined with the revenue growth and margin accretive businesses to drive improvements in this line. As Sumit elaborated on earlier, third quarter advertising and marketing expense was $150.3 million or 6.8% of net sales, an 80 basis point improvement over third quarter 2020. Third quarter net loss was $32.2 million, improving $0.6 million versus the third quarter of 2020, and net margin improved 30 basis points to -1.5%. Adjusted EBITDA was $6 million, improving $0.5 million versus the third quarter of 2020, and adjusted EBITDA margin was flat at 0.3% as gross margin improvement and greater marketing efficiencies were offset by cost pressures in SG&A. Moving on to free cash flow. Third quarter free cash flow was $2.3 million, reflecting $74.3 million in cash flow from operating activities and $72 million of capital expenditures. Operating cash in Q3 reflects a nearly $100 million increase in inventory since the start of the year as we took action to protect against further supply chain deterioration and prepared for holiday sales. Capital investments include an initial spend related to our new fulfillment centers in Reno and Nashville, which are projected to launch in 2022. Our most recent FC opening in Kansas City and capitalized labor for software development. In line with historical trends, over 80% of our capital spend this quarter was focused on building capacity for growth. We finished the quarter with $727 million of cash and cash equivalents on the balance sheet and no debt. This cash, combined with available capacity on our ABL, provides us with nearly $1.2 billion of available liquidity. That concludes my third quarter recap. Now let's discuss our fourth quarter and full year 2021 guidance. As Sumit also articulated his remarks, we have plenty of reasons to be optimistic about the pet industry, e-commerce in general, and our business in particular. The overarching positive trends of more pet ownership, higher spending per pet, and the secular shift to online are as strong as they've ever been. Balancing the strength of these underlying demand trends against the expected sales impact of ongoing supply shortages, our current revenue outlook is as follows. We expect fourth quarter net sales to be between $2.40 billion and $2.44 billion, representing 17%-19% year-over-year growth. This brings our full-year outlook for 2021 net sales to between $8.90 billion and $8.94 billion, representing year-over-year growth of 25% or approximately $1.8 billion. At the same time, macro uncertainty remains elevated, and we expect supply chain disruptions, labor shortages, and product and inbound freight cost inflation will continue to weigh on near-term profitability. Additionally, we will start to absorb higher shipping costs in January when our outbound freight and logistics contract renews. Reflecting these factors, we now expect our full year 2021 adjusted EBITDA margin to be in line with full year 2020. With these net sales and adjusted EBITDA margin ranges, 2021 adjusted EBITDA would increase 26% year- over- year. Here at Chewy, we continue to execute and follow our long-term growth and margin expansion roadmap. Even as consumer demand patterns shift from a pandemic to post-pandemic footing, we will allow significant growth on top of the record growth we achieved in 2020. This is a testament to the strength and durability of demand in the pet category and of Chewy's ability to attract new customers, expand share wallet, and gain market share. Moreover, during a period of unprecedented cost pressures on multiple fronts, including inventory, labor, and freight, we still expect to expand growth margins and growth adjusted EBITDA on a full year basis. As we continue to execute our long-term strategic plan, we remain optimistic about the future and the progress we are making in our journey to be the most trusted and convenient destination for pet parents and partners everywhere. With that, I'll turn the call over to the operator. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Doug Anmuth with JP Morgan. Please go ahead. Thanks for taking the questions. Sumit, maybe if you could just talk about customer acquisitions a little bit. I know you said they remain above pre-pandemic levels. Not sure if you quantified perhaps at all relative to the 20% growth that you talked about in the first half of the year. Related to that is your view on the higher LTV for the current cohort, is that essentially just driven by the higher NSPAC that you're seeing early on for that cohort? Just perhaps on the cost side, any sense of visibility or how you're thinking about timing around easing of freight costs and product cost inflation, labor, and I suppose the competitor pricing dynamics as well? Thanks. Sure. Hey, Doug. So three questions. In terms of, you know, quantifying the ratio of the volume of acquisitions, you know, they remain within range that we've reported before, Doug, so not much to report there. The exciting, you know, trend continued to be on the NSPAC side, without any concern on the acquisition side, is the way that we interpreted the business in third quarter. On the LTV, you know, we're projecting or estimating this on two bases. One, yes, on the way the customers are interacting with NSPAC. For example, when you look at, you know, the cohort now that has completely matured one full year, the cohort of customers that we acquired even last year, you know, when they've lapped the full year, they're actually spending roughly $420 in NSPAC, which is higher than the three-quarter cohorts when you compare them to 2019 levels, by a reasonable amount. That's, you know, sort of a data point on indication. Number two, you know, we're looking at customers engaging with Autoship and the way that they're building baskets and the way that they're interacting with our other verticals and solutions that we're launching. A combination of all of that is how we're sort of estimating or predicting LTV. Usually, we're fairly accurate at this point, because this is also something that we guide, you know, in the background to be able to make marketing investments, which then guides our LTV to CAC ratios and the way that it spends and amplifies our investments in marketing and then customer acquisition, and then that spends the NSPAC five-year, et cetera, et cetera. Your last question on cost and timing. Cost, you know, we're really seeing, just to summarize, we're seeing three different types of costs, right? One is in terms of, you know, the flow of material, domestically and internationally. You know, what hit Q3 was primarily import driven by port congestion and container rates, you know, really spiking. In fact, what we saw in Q3 was a three times increase in inflation on spot rates relative to Q1 time frames. Q3 is generally 1/4 when you start ramping up or preparing for peak and holiday, and therefore the ramp curve, you know, multiplied by the rate of inflation that we saw on that side is what drove the costs. We have seen that starting to abate. There we expect the prognosis to be in the next couple of quarters. We should essentially be able to claw back any investments that went towards increased import freight management. The second type of cost that we're seeing, of course, is, you know, product inflation costs, which as we've articulated in the script, you know, there was an escalation both in terms of rate as well as in terms of the volume or the assortment that actually took the inflation. Now, you know, given the price transparency that exists in e-commerce channels, price catches up to cost a little more gradually, and we have to execute through that, thoughtfully and deliberately so as not to impact customer demand in the near term. We expect, you know, a few quarters in the way that this price sort of moves through the marketplace. It also depends on how others react to the demand that they might be seeing in their channel, and therefore how, you know, the rest of the market invests in pricing to be able to drive demand. In that way, you know, we remain in observation mode, and providing a clear answer is a little bit hard today. We don't expect this to be a long-term pain. It should be a few quarters. Then the final one is labor costs. That's been, everybody's been following the same data patterns that we have. In terms of labor, you know, our fill rates did improve post the September time frame that we were anticipating. We still remain materially below our fill rate in terms of the expectation and what we need to run our network in an optimal manner. You know, we are not projecting any, you know, near-term recovery, or we're not projecting recovery, and rather we just sort of wait for signals in the market as we exit 2021 and enter 2022. More to come, and I'm sure we'll have more conversations on that front. Thank you. That's helpful. Our next question will come from Stephanie Wissink with Jefferies. Please go ahead. Thank you. Good afternoon, everyone. We have two related questions about marketing. The first is just on your marketing efficiency. It seemed like there was a nice step up in efficiency in the quarter. I'm wondering how sustainable you think that is. Is that related to ad rates or just better precision around the money you're spending? Then related to that, I think you mentioned in your prepared remarks that there were some shortages that accounted for about $50 million of maybe missed revenue in the third quarter. Did you pull back on marketing because of shortages, or was there an opportunity maybe to lean a little bit more heavily into marketing, or can you in the coming quarter to try to drive either actives or NSPAC? Thank you. Hey, Seth, it's Sumit. I'll take that one. So you read on marketing in Q3 is exactly right. You know, it was a combination of both ad costs reverting from their Q2 highs, as well as the team executing just, you know, on a more targeted and just executing shop. We provided the details, you know, in the script around the way that we generated demand across certain audiences and the way that our propensity modeling kicked in to be able to generate greater efficiency, which we also saw when customers came to our website. If you were to quantify the two, I would say likely a 65-35, you know, sort of ratio where ad costs probably were responsible for 60% of the improvement, 60%-65%, and then, you know, the rest was our own efforts. You know, in terms of sustainability, so far, you know, Q4 is coming in line with our expectation. So we'll continue to monitor this, and any investments that we've baked in are already reflected in the way that we're providing guidance today. And yes, of course, you know, when out-of-stocks escalate, it does reflect directly in the way that we go to market and spend on marketing towards that particular set of assortment that then drives customer acquisition. There was definitely opportunity, you know, probably a few more $ million that we could have spent in marketing. Outside of that, you know, we optimize marketing to the full extent. Our next question will come from Mark Mahaney with Evercore ISI. Please go ahead. Okay. I apologize I came in late. I hope these aren't repetitive questions. At the end, you talk about the last two roadmap components. One is non-vet services. Could you just remind us again what would be in there? Secondly, on the Trupanion deal, are you disclosing any economics around that? You know, how should we interpret that? Our guess from you know, Evercore's part is that that should be a nice over time, a nice gross margin boost for you. But if you could explain, talk through that and who's gonna own the customer relationship or who's gonna record the revenue, maybe that would be a useful way for us to think through the gross margin impact of that deal. Thank you very much. Sure. Hi, Mark, this is Sumit. Your first question was okay, the non-vet services. On non-vet services, we interpret that market to be, you know, everything that is not related to healthcare services, which is boarding, grooming, puppy training, anything that you would like to, you know, to add in there in that regard. We anticipate or estimate that to be roughly $10 billion-$14 billion in TAM. The way, you know, we think about it, I think I'll just add a note here. You know, our entry here will not—we will not have to prepare our business and our teams to enter this vertical from scratch. In that way, you know, the investments that we've made in developing our architecture and technology around healthcare solutions, you know, you should, you know... The best way to think about that is, you know, we're creating a scalable and dynamic platform that allows us to reach customers. On the other side of the platform today, in terms of, you know, the business provider, you could consider a veterinarian, but tomorrow we could very efficiently extend that same service to a different service provider such as a groomer. In that way, it's not a net new effort on our part, and it's a matter of focus and prioritization. That's why we say it's a matter of when and not if. Now coming to the second part of your question in terms of insurance. A couple different things there. We haven't disclosed the deal structure in its entirety or detail, and we'll have more detailed conversations when we get closer to launch in the spring timeframe. What I can tell you today is that you know, the deal is a combination of cash and equity, you know, we will essentially respect Trupanion's you know, IRR guardrails, and allowing them to stay within their IRR guardrails and extracting a maximum value against that you know, some in cash and some in equity. We will utilize the cash you know, which will essentially be, you can view that as cost of marketing or acquisition to be able to fund the growth in business, to be able to drive customer conversion, education, awareness. You know, we are essentially providing the customer base and the platform, and Trupanion is underwriting the policies. Okay. Thank you very much, Sumit. Our next question will come from Brian Fitzgerald with Wells Fargo. Please go ahead. Thanks, guys. You kind of talked to this a little bit, but I wanted to ask about the reduction of the high end of the annual revenue guidance range. Could you walk us through the key factors influencing your thinking there? Is that supply chain issues and stock-outs, or the need to get a little slower on marketing, you know, despite the improved efficiencies you're seeing, just given the various supply chain issues, cost pressures, SG&A and so forth? Want to drill down a little bit on the key drivers there. Sure. Hey, Brian, it's Mario. I'll take that question. Look, as we said in the opening remarks, the consumer is healthy, demand was strong, site traffic, conversion, customer acquisition, order volume, basket size, purchasing frequency, all those are strong, and we see positive trends in the third quarter. What we're doing with the guidance is we're acknowledging what we're seeing in the market. As you said, out of stock remains a persistent issue in certain parts of the catalog. Coming into the third quarter, we expected additional capacity to come online in the wet food category specifically, and that has yet to happen. In fact, supply has become more constrained than it was in the second quarter. I think you're exactly right. The short answer to your question is that our updated guidance is simply just reflecting the facts, the reality on the ground. Now, keep in mind that we have continued to provide top line guidance throughout the entire pandemic. Even with all the macro uncertainty that has been around supply chain and labor, we've been exceptionally accurate. If you look at our net sales guidance range and where we've come in, we have either hit or exceeded our guidance range since we went public, by the way. In the last two quarters, we've been right in the middle of the very tight guidance range. You know, again, what we're doing is reflecting the reality on the ground when it comes to supply. Awesome. Really appreciate it, Mario. Thank you. Our next question will come from Deepak Mathivanan with Wolfe Research. Please go ahead. Hey, guys. Thanks for taking the questions. Just a couple ones from us. First on the NSPAC side, you know, you're seeing nice benefits from the maturation of large cohorts this year. As we go into next year, what will be the main drivers of sustained NSPAC growth? I mean, can NSPAC continue to grow at these rates as you know, some of the larger cohorts mature further? The second question on the cost side, thanks for all the color on the cost side in response to Doug's questions. Could you elaborate on two areas? One is aggressive competitive pricing that you noted in the prepared remarks. The second, you know, the increase in freight costs that's kicking off in January, maybe, some color on how much they contributed to gross margin and how we should think about, you know, some preliminary expectations for gross margin trends for next year. Thank you. Yeah. Hey, Deep, it's Mario. I'll start off, and maybe Sumit can touch on the second part of your question. In terms of NSPAC, let me not comment on 2022 just yet. What I'll tell you is this, if you look at what's happened this year, Sumit touched on this in one of his answers just a few minutes ago. We've had the maturation of our 2020 cohort, which is very large, and it's proven to be a more engaged early-on cohort than prior, than if we look at, for example, 2019. We're seeing their first year revenue or purchases with us to be even higher than the 2019 cohort. If you turn to what we've seen this year, cohorts that we've acquired in 2021 are showing that their first order is even higher than the ones from last year, which already was higher than the year before. In fact, it was about 6% higher than what we saw customers purchase in the initial order in 2020, and 13% higher than 2019. Factors that are driving that, of course, it is we expand the catalog. We've gotten better at our at the selection we're providing to our customers. We certainly have provided a broader set of categories, and we certainly talked about that in terms of our proprietary brand catalog and the development in that area, which tends to focus on the white space of products that are not in the market that we create and offer to our customers. Of course, our pharmacy business, which is doing very well, and the more customers get exposed to and buy from our pharmacy, the bigger the NSPAC. All of that is absolutely evident in our revenue breakdown that we show in the 10-Q. If you look at our other category, which includes proprietary brand and pharmacy, that's growing at almost twice the speed as the rest of the business. Think about it that way. There are catalog expansion, there's category expansion, and we're just getting better at presenting the customer with what they want when they want it, which means that we can continue to expand NSPAC. Sumit, if you wanna touch on the outbound freight contract. Hey, Deepak. You had two questions in your second question. I'm not sure I fully followed the competitive pricing comments, so I'll have you repeat that, but let me offer you the FedEx answer first. Logistics companies, as you know, were very clear in their recent earnings call that they were looking to raise rates in 2022. We recently completed negotiations on a new contract that goes into effect in January, and we will see outbound shipping rates in 2022 go up under this calendar. That said, you know, we're pleased with our new contract, as pleased as we can be, and believe that our new rate card, while higher, you know, remains favorable relative to the broader market. Yeah, it's too early to quantify the gross margin impact of these higher rates, given the many factors that will ultimately drive our outbound freight costs in 2022, including volume, average shipping distance, and others. You know, plus we're very actively you know, still dealing with many macro uncertainties and constraints. We'll have more details to share with you in the next quarter when we provide 2022 guidance. Got it. Yeah. Sumit, the first part was basically you noted one of the factors of gross margin that impacted gross margins were aggressive competitive pricing. Is that just related to the product inflation, you know, that you're not seeing some competitors kind of follow in the marketplace, or is there something else? You know, maybe one competitor is being aggressive with prices more broadly. Is that a Q3 question you're asking, or is that a carryover from Q2 that you're asking about? Q3 question. Because all we're essentially saying is, you know, there's a delay between MAP and cost inflation increases, you know, given that it takes a little bit of time on the online channels for the MAP pricing that determines the floor in the market and the prices to reflect that. Plus, if you notice, you know, the range of the cost inflation that has come through, that usually needs to be piecemealed back into the market so as to not impact demand or momentum. You know, any pricing comment that I believe was made in the past has been in relation to muted pricing environment or the lack of promotions and discounting given the supply chain constraints. You know, we've seen that obviously starting to abate a bit, but it normally does as you exit Q3 into Q4 because it's a more seasonal and demand elastic period. On balance, you know, that phenomenon or that effect has not gone away yet. Got it. Okay. Thanks, guys. Very helpful. Our next question will come from Dylan Carden with William Blair. Please go ahead. Thanks a lot. Yeah, just curious, the comments about NSPAC fourth quarter to third quarter. Was that meant to be in dollar terms or sequential or annual growth? I'm just curious when the sort of churn overhang eases. Should we start seeing that by the fourth quarter, or do we really need to get into 2022? Finally, you know, related, on the gross adds running higher than sort of pre-pandemic levels, do you attribute that to still some, you know, benefit in that there's some broader sort of consumer anxiety in being in stores, or do you think that's actually now at this point more organic online migration? Thanks. Hey, Dylan, this is Mario. Maybe I'll start and maybe Sumit Singh can add some of some to my answer. When it comes to the stable NSPAC, I'm not sure. I don't think I mentioned that. I don't think I've said that. Maybe I'll ask for a clarification on that one. Let's start there. Yeah. Sorry, that might just been me being distracted. I thought the comment was that NSPAC growth would be stable 3Q versus 4Q. I was just wondering if that was in dollar terms or if you think, you know, maybe you'll get 15% sort of steady state growth into next quarter. Actually, I would maybe flip that, Dylan, and say that we expect net pack growth to continue to be strong through the rest of the year. That's maybe more the takeaway there. Okay. You can see that in our sales guidance and obviously where we're trending in terms of you know active customers for the year. In terms of the overhang, you really have to get into 2022. The reason being is that when we look at the 2020 cohort, very large cohort like we talked about before, it was pretty evenly spaced throughout the year. Any first year into second year attrition that we normally see with every cohort from the beginning of the company we're going to see that happen throughout this year. The impact will continue to be through 2021, and we should work through that as we enter 2022. Great. Then, yeah, I was just curious on the sort of comments around gross adds being above pre-pandemic levels, you know, to what you attribute, if that's more organic online migration or still some benefit from sort of the environment that we're in? Yeah. Maybe I'll, again, I'll touch on this one and then Sumit, if he wants to add anything. Part of it is we are investing more, you can see that in our financials, to drive, to help more people find us. It is the shift online that we are not only benefiting from, but also we're helping customers find the you know, find us and find the products and the services they need online. Yeah, Dylan, we're not. I don't think it's apples and oranges comparison. We're purely comparing, you know, organic state that existed up until 2019 to the same organic state. I don't believe we're getting any benefit from the pandemic movement or the ongoing pandemic in this particular case. Excellent. Thank you very much, guys. Sure. Our next question will come from Lauren Schenk with Morgan Stanley. Please go ahead. Hey, this is Nathaniel Feather on for Lauren Schenk. I know in the past you guys have talked about being more of a price taker in the market. Given the inflationary environment, is there any change to your price strategy, or is that broadly similar? Are you able to quantify to what extent you're flowing through this increased cost and prices? Or, you know, how much that delay between the change in net pricing and the actualization within prices affects revenue? Thank you. Sure. Not much more to add than what I've already provided context. At the risk of being slightly redundant, you know, we are reflecting in one of our tenets the most competitive prices that we can be at, which is usually respecting MAP guidelines. You know, because we believe that's an important tenet to retain customer trust in the marketplace and through and in relation to our brand. The comment on MAP and the cost and price catching up, you know, we're not estimating yet the number of quarters it might take us. In certain, you know, large consumables brands, MAP's already reflected and fully caught up. I think we'll have to go and observe this on a piece by piece and a portfolio by portfolio basis. It will also depend upon the demand and supply balance between in the way that inventory flows through or supply becomes available in the marketplace in how you know quickly or how much of a lag there exists in the way that this corrects itself. As we play through Q4, we'll come back and educate you and share with you more on the March earnings call relative to that. Okay, great. Thank you. Our next question will come from Eric Sheridan with Goldman Sachs. Please go ahead. Thank you so much. Maybe just one question on the health side of the equation. You gave the stat around 15% as the overlap between core customers and health customers. Can you give us a little bit, sense of how you wanna align investments, especially in the marketing side, to drive adoption of the health initiatives and create a sort of larger Venn diagram between the customer sets as we look out to 2022 and beyond? Thanks so much. Hi, Eric, this is Sumit. I think the mental model is very much aligned to, you know, investing as heavily as we can, you know, up until the point that we see a return. This, as you know, is a legacy category, you know, and the rate of migration towards online has been muted up until the point, you know, we believe, you know, we've credibly, you know, improved the customer experience on the online side, and therefore, we're driving sort of a rate of migration towards online, which is different than what consumers have enjoyed or are used to as it comes to buying dog food or their accessories online. You know, there's a little bit of that that impacts, you know, this particular conversion that we're driving. In that way, you know, we're balancing investment, the conversion, and the returns that we're getting. Now, of course, you know, we've mentioned in the past that healthcare customers are more profitable and higher LTV, you know, given the stickiness and the longevity of the need state that we're serving there. So that naturally, you know, also suggests that the LTV of a customer is higher, and therefore we tolerate a higher marketing cost, you know, on a per customer basis in healthcare as well. But again, it goes back to the methodology of LTV to CAC, and we don't have a specific budget that we spend to. We spend as long as there is return that we can find. Overall, this is an enterprise-level priority for us. You know, what you're seeing us do here is we're leaning in, offering many different choices, right? If you're interested in insurance, we can offer you that. If you're interested in Telehealth, we can get you through that. If you just have a pharmacy prescription need, we can serve you the best customer experience in the market right now. If you would like to subscribe to veterinarian diet, we can do that as well. Overall, you could think about us building an ecosystem that has many tentacles and attracts customers through many different dimensions and keeps them within that ecosystem and connects it in a closed loop manner across the veterinarian community is the way that we can grow healthcare. Eric, this is Mario. Two quick things. One is welcome back. It's good to hear your voice. Number two is last time we spoke about the overlap, it was about 10% we had said. You can see the progress we're making, and getting more of our customers to shop across more categories on our platform. Great. Thanks so much, guys. Our next question will come from Seth Basham with Wedbush Securities. Please go ahead. Thanks a lot, and good afternoon. My first question is just around the gross adds that you mentioned. You said that they are higher than 2019. Last quarter, you said that the first half was up about 20%, versus 2019. Year to date now, are they still up 20% versus 2019? Yes. I think, Seth, Sumit answered that question a few minutes ago, but it is, they're still about in line with what we had shared with you before. In line with the rate of the second quarter or 20% versus 2019? It's not a metric that, you know, we're planning on repeating every quarter. I think the perspective was important and slightly different when we shared it last time. Mostly, customer adds continue to run above 2019 and very much, you know, in line with what we've seen so far, you know, throughout the rest of the year as well, or throughout the preceding year as well. Got it. Okay. My follow-up question is just around the supply product constraints that you mentioned, which were more pronounced in the branded side of the business. I don't think you called out private label mix shift being a positive driver of gross margin like you did last quarter. Can you square away those two things? Private label was a driver. If you look at the overall hard goods growth, you know, 3P hard goods grew at about 8% year-over-year, but private label grew 32% year-over-year, taking share. You know, the private label component is also where you know, our import supply chain kicks in. You know, as a result of the disruptions, we were in fact delayed in launching some assortment that we had planned to launch in Q3 and in Q4, which is of course reflected in the elevated out-of-stock you know numbers that we've quoted here in Q3 and that we're baking into the guidance. On a growth basis, private label in Q3 grew at 32%, and the penetration remained between 18%-20% levels. Wonderful. Thank you. Sure. Our next question will come from Peter Keith with Piper Sandler. Please go ahead. Hey, thanks, sir. Good afternoon, everyone. Looking at the guidance now for EBITDA margin to be flat, I guess we're calculating that Q4 EBITDA margin is going to decline about 300 basis points year-on-year. I'm wondering if, is this kind of the low point for margin decline because there's maybe some nuances to Q4 with hard goods or freight, wages? Could you just kinda help frame that up for us, or is this the type of pressure that certainly could continue into next year? The answer essentially lies in a combination of, you know, so far, right, if you break down Chewy's progress through our IPO, gross margin has expanded 700 basis points. Marketing has scaled roughly 400 basis points. And SG&A, you know, was on track to scale up until we started absorbing the cost that has come through the pandemic. In terms of, you know, the way you should think about EBITDA moving forward is we still have room to expand gross margin, you know, along with the balance of dealing with headwinds of obviously, you know, rising freight costs and the inflation that we talked about today. In terms of marketing efficiency, we continue to deliver that. That brings us back to EBITDA. It brings us back to SG&A, where, you know, we've essentially incurred roughly $100 million of investment in 2020. You know, up until the point the labor markets kind of relax or, you know, the imports get better, it's hard to, you know, assess the health and state of SG&A as of this point. All of that is baked into even the guidance for the year. If there's a more specific question, happy to answer it. Sure. Maybe I'll just focus specifically on gross margin. You're not guiding for gross margin, but it seems like what you're talking about with ocean freight pressure and the competitive environment, that gross margin is gonna be abnormally pressured in the fourth quarter. Can you confirm that? Are these pressures peaking in the fourth quarter? Maybe, you know, hard goods mix comes down a little bit as we get into the early part of next year, and so the overall gross margin pressure abates somewhat. Yeah, certainly. Hey, this is Mario. I won't comment on 2022 just yet, but it's what we talked about when we explained the Q3 results and how some of the challenges on the cost side are not abating just yet for the fourth quarter. Let's take that off the table and say, look, we expect that to continue in the fourth quarter. That would obviously affect gross margin. If you compare it to last year, in Q4 last year, we also had a one-time item or a special item that was a $16 million reserve release that flowed through to EBITDA. You have to take those two things off the table, and then you say, "Okay, what else is new this year?" Well, we have the higher labor costs that are still affecting us, and we expect it to continue into fourth quarter. We expect that to abate. Sorry, we expected that to abate in the second half, however, did not abate in Q3, and now we're expecting to continue into Q4. In fact, for Q4, we expect it now to be $30 million as opposed to the roughly $15 million that we had guided to or had spoken about when we did the second quarter call. So take the one-time item off the table. You say gross margin continues to be somewhat pressured in the near term, and then you have the higher labor costs and that kind of gets you the math on fourth quarter. Okay. Thanks so much, guys. Good luck with the rest of the holiday season. Thank you. Thank you. Our next question will come from Rick Patel with Credit Suisse. Please go ahead. Hey, guys. Thanks for taking my question. I'm hoping we can zoom out, and we can talk about how you see NSPAC trending in the future relative to your IPO plan. Historically, I believe when you acquire a new customer, year one spend is between $150-$200. It jumps to $300 in year two and so on, but the curve has obviously shifted higher. Just curious, what's the right way to think about spend for newer cohorts as we think about their multi-year journey with you? Spend to acquire those customers, or you mean their spend? Yeah, the NSPAC. Yeah. You know, I answered those questions a few minutes ago. I won't comment on 2022 and beyond at this point, but I can tell you that what we're seeing from customers that we acquired last year and that we acquired this year is that their NSPAC curves are shifting up. One of the things that we talked about before is that the way we improve LTV to CAC for our customers over time or accelerate payback period is by acquiring more of the share of wallet earlier, moving up the NSPAC and making every order more profitable. We're doing exactly that. Over the last two years, you've seen us expand gross margin by 300 basis points roughly, and year-over-year, we're looking to increase gross margin. You've seen us also increase NSPAC, and we've talked about specifically for cohorts in 2020 and 2021 and how their NSPAC is moving up. Not only are we grabbing more of the share of wallet from those customers, we're then also moving up the overall curve, and we're making those orders or those dollars more profitable. All of that helps us in the payback period. All of that helps us improve the LTV to CAC. These are very good indicators for us this early on in their journey. Thanks very much. Our next question will come from Chris Bottiglieri with BNP Paribas Exane. Please go ahead. Thanks, guys, for taking the question. First one's just more high level on the Chewy Trupanion partnership. Should we view this as an isolated high margin revenue stream, or are there meaningful synergies with your broader pet health offering? Trying to understand if there's incentives in place for, you know, insurance to use telehealth, RX drugs, or even to, like, refer some of these pet insurance customers towards Practice Hub. If you can kinda give us any sense of the strategic view here, that'd be helpful. Sure. We believe the value of insurance is twofold. You know, presently pet insurance in the U.S. is 2%-3% penetration versus markets such as the U.K., where the penetration, as I was mentioning, was north of 25%. We view this as a huge opportunity to open up TAM. You know, additionally, we expect we even expect insurance, you know, to be a profit center in itself. But in addition to that, we also expect it to drive greater customer engagement, brand loyalty, and greater consideration for healthcare purchases that happen, you know, on or through our platforms, like the ones that you're alluding to. Now, you know, we have a lot of innovation left. You know, we will launch in spring and kind of go on a state-by-state basis. There's going to be many opportunities for us to have these type of conversations as we come and share some of the plans that we're bringing to market, the value proposition behind that plan, the way that we will, perhaps, you know, think about go-to-market or marketing strategy, in a way that we talk to customers and veterinarians, which I believe will provide more light to some of these questions that you're asking. Broadly speaking, what you should walk away with it is, you know, it's a long-term play. We expect it to drive greater engagement and greater consideration for healthcare purchases that happens on or through our platforms. Gotcha. That's really helpful. Then just the last one, I'm not sure you can answer this or willing to answer it, but, you know, can you give us some sense, I know there's obviously a difference between that pricing and the hard goods side. Can you give us a sense of how the cost inflation or price inflation, how that compares between the two? Overall, I think just throughout retail, we're seeing somewhere between 4% and 7% inflation in a lot of our categories. Trying to get just a sense of where that stands for pet and how that's impacted PetSmart. That's actually a pretty good range. You know, our upper end of the range lies all the way up to 9%, but you know, that's a fairly. You bounded it fairly well. Yep. Okay. Perfect. Thanks, guys. This concludes our question and answer session. I would like to turn the conference back over to Sumit Singh, CEO, for any closing remarks. Thank you very much. We hope you have a happy, healthy, and safe holidays. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.