Good evening, everyone, and thank you for joining today's Chewy third quarter fiscal year 2022 earnings call. My name is Don Tano, media operator for today's call. All lines will be muted during the presentation portion of today's call when an opportunity for questions and answers at the end. If you would like to ask a question, it is star one on your telephone keypad. I would now like to pass the conference over to our host, Mr. Robert LaFleur, Vice President of Investor Relations. Sir, the floor is now yours. Thank you for joining us on the call today to discuss our third quarter 2022 results. Joining me today are Chewy Chief Executive Officer, Sumit Singh, and Chief Financial Officer, 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 inflation and its effect on the economy and our industry. 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. Also, 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, including our annual report on Form 10-K. Also, during this call, we will discuss certain Non-GAAP financial measures. Reconciliations of these Non-GAAP items 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 a substitute for GAAP results. Unless otherwise noted, results discussed today refer to the third quarter of 2022, and all comparisons are accordingly against the third quarter of 2021. This call in its entirety is being webcast on our investor relations website. A replay of this call will also be available on our Investor Relations website shortly. I'd now like to turn the call over to Sumit. Thanks, Bob. Thank you all for joining us on the call today. Building on the momentum we reported in the second quarter, Chewy's Q3 results showed accelerating double-digit top-line growth, a sequential increase in active customers, sustained gross margin expansion, and solid free cash flow generation. We experienced strong demand throughout the third quarter, especially across our non-discretionary categories, which provided a solid foundation for our growth. The resilience of the underlying demand in these categories, coupled with our ability to grow customer share of wallet, again enabled Chewy to outperform broader industry trends and take incremental market share. Q3 net sales were $2.53 billion, a year-over-year increase of 14.5% and a sequential acceleration from the 12.8% growth in the second quarter. Our top-line results were anchored by the predictable nature of our Autoship customer sales, which grew nearly 19%- 73.3% of net sales, and by rising customer engagement as measured by net sales per active customer or NSPAC, which grew nearly 14% to $477. Digging a little deeper into our Q3 net sales, non-discretionary categories like core food and healthcare collectively made up over 83% of our net sales and were the primary growth drivers, reflecting healthy unit demand and improved in-stock levels. Within discretionary categories, hard goods showed relative improvement in Q3, with sales declining 5% year-over-year, which is a 400 basis point improvement versus the second quarter year-over-year performance. We remain confident that hard goods sales will return to their growth path as the economic environment improves. Taking a longer-term view, over the last three years, our third quarter hard goods sales are up 70%, gross profit has nearly doubled, and gross margin has expanded by over 400 basis points. Shifting to overall company profitability, Q3 gross margin expanded 200 basis points year-over-year to 28.4%, which is a new quarterly high. Our gross margin performance this quarter reflects the favorable comps from Q3 last year, the continuation of strong pricing trends without any noticeable impact on demand, and the incremental benefits we realized from our ongoing supply chain and logistics transformation. Q3 adjusted EBITDA was $70.4 million, and adjusted EBITDA margin was 2.8%, an increase of $64 million and 250 basis points, respectively. The primary drivers of adjusted EBITDA growth were higher gross margins and accelerated scaling of SG&A, results that showcase our ability to get big fast and get fit fast as we simultaneously drive top line growth and expand margins. Moving on to customers, we ended Q3 with 20.5 million active customers. Gross customer additions accelerated 6% sequentially and are up 9% compared to Q3 2019. Consistent with recent quarters, customer retention rates remain stable as we continue to work through the initial attrition phases of our pandemic-era cohorts. In the third quarter, as consumers shifted their focus away from summertime pursuits like travel towards the upcoming holiday season, we saw opportunities to increase our level of marketing investment compared to recent quarters. While ad supply remained tight, we found ROI-positive opportunities consistent with our philosophy to maximize LTV payback, and we invested accordingly. Let me update you on some of our latest innovations as we continue to build out the Chewy Health ecosystem, expand into new and exciting high-margin verticals, and make meaningful strides in our supply chain transformation. Starting with Chewy Health, we recently announced the expansion of CarePlus, our exclusive suite of insurance and wellness offerings with plans provided by Lemonade. Combining the products from Lemonade and Trupanion under the CarePlus banner enables us to diversify our product offerings across the full spectrum of price points and coverage options in order to meet the needs of a wider range of pet parents. We are targeting a nationwide launch of our Lemonade offerings beginning in spring 2023. We remain bullish on the pet insurance space and our ability to drive customer acquisition and deepen customer engagement. Elsewhere in Chewy Health, we recently launched Vibeful, our first private brand in the pet wellness category. Vibeful is a line of supplements featuring products from multivitamins to hip and joint supplements. The non-prescription pet health and wellness category has an estimated 2022 TAM of over $2.4 billion. Given the increased consumer focus on wellness and the ongoing trend towards pet humanization, we believe this launch gives us another opportunity to strengthen our connection with customers and to drive top and bottom-line results. Moving to new lines of growth, we recently launched the beta version of our Sponsored Ads program several months ahead of schedule. Sponsored Ads are dedicated product placements on chewy.com that promote specific products from select vendors. With these ads, our suppliers can seamlessly advertise to our 20+ million active customers. We believe Sponsored Ads will enable us to scale contextual advertisements, which in turn should deliver highly relevant products to customers and high-margin revenue to our business. The full launch is on track for 2023. Last but not least, we continue to make excellent progress transforming our supply chain and logistics operations and developing world-class capabilities across our organization. More importantly, these efforts produced meaningful operational and financial benefits throughout the company in Q3. First, our automated FC network is handling an increasingly larger portion of our outbound shipping volume at progressively lower variable costs per order. In Q3, we shipped nearly 30% of our volume through our automated FC network, up from 10% in Q3 last year. Second, our inventory rebalancing efforts through enhanced software and planning capabilities have improved in-stock levels across our network, which has lowered costs by reducing average shipping distances by 25% compared to last year and enhanced customer experience by reducing click-to-deliver times and improving order accuracy. These efforts have been complemented by our Middle Mile initiative, which also cuts average shipping distance and reduces costs. Our two new import routing facilities are on pace to handle 90% of our import volume by the end of 2022, which further enhances our ability to optimize inventory distribution across our FC network and reduce inbound freight costs. Collectively, these supply chain and logistics efforts have allowed us to mitigate freight costs, begin leveraging our SG&A expenses a quarter ahead of schedule, and improve customer experience on multiple fronts. Let me conclude with the following. The operating environment remains dynamic and evolving. What hasn't changed is how much pet parents value the enduring companionship of their pets, and it is this emotional bond that sustains the pet category through all phases of the economic cycle. Chewy's compelling value proposition, backed by low prices, personalized service, and delivery convenience across a broad selection of products, continues to resonate with our customers. This enables us to build the long-term trust that, in our view, allows us to outgrow our competitors and take market share. Concurrently and unequivocally, our team's relentless focus on execution and operational excellence allows us to take this growing market share and transform it into incrementally higher profitability and in growing free cash flow. Before I turn the call over to Mario, I would like to share an important development with you. After nearly 8 years at Chewy, Mario has decided to retire from the company. It's too soon to plan his retirement party or order the proverbial gold watch, although those things will be appropriate sometime next year. As of today, we have no specific date in mind for Mario's departure, and our intent right now is simply to inform you of our transition plans. We have begun a search for top-tier internal or external candidates for this important and strategic position. In the meantime, it's business as usual, and we are grateful to have Mario's services for as long as necessary to find and ramp a worthy successor. Please understand that this is not a matter about which we will provide regular updates, and we don't plan to comment about this until we have a successor in place. With that, I will turn the call over to Mario. Mario? Thank you, Sumit. Appreciate the kind words, and I'm looking forward to a little R&R when the time comes. Until then, it is business as usual. Let's talk about our third quarter results. Net sales increased 14.5%, or $320 million- $2.53 billion. Growth was led by our nondiscretionary consumables and healthcare categories, which collectively represented over 83% of our Q3 net sales. Driving our third quarter net sales growth was an 18.8% increase in Autoship customer sales, which reached a new high of 73.3% of net sales, a 13.8% increase in NSPAC, also a new high for the company, and an active customer base of just over 20.5 million, increasing approximately 30,000 versus the second quarter and 100,000 versus last year. Moving to profitability, our third quarter gross margin expanded 200 basis points year-over-year to 28.4%. Approximately 100 basis points of the year-over-year improvement is a result of favorable comps against Q3 last year, when global supply chain disruptions and product cost inflation adversely affected our gross margin. The balance came from continuation of the strong pricing trends that emerged last quarter and greater efficiency in outbound shipping costs, which resulted from bigger basket sizes and the favorable progress we've made in our supply chain and logistics initiatives. Continuing on to OpEx. SG&A, which includes all fulfillment and customer service costs, credit card processing fees, corporate overhead, and share-based compensation, totaled $543.5 million in the third quarter, or 21.5% of net sales, compared to 21.1% in the third quarter of 2021. Excluding share-based compensation, SG&A totaled $497.4 million or 19.6% of net sales. This is an improvement of 60 basis points compared to the third quarter of 2021 and was flat on a sequential basis. As we shared previously, we expected to begin leveraging SG&A expenses excluding share-based comp as we exited 2022. We are pleased to be a quarter ahead of schedule in delivering on this expectation. I will now take a moment to elaborate on how our efforts to leverage these costs are paying off. First, greater efficiency and variable fulfillment costs provided 120 basis points of leverage in the quarter, led by ongoing improvements in fulfillment center productivity from our expanded network of automated FCs. As Sumit shared in his remarks, nearly 30% of our Q3 volume shipped from automated FCs, compared to 10% last year. This helped drive down variable fulfillment cost per order, which provided about half of the Q3 year-over-year cost leverage in this area, with the remainder coming from an increase in average order size. We also gained an additional 20 basis points of SG&A leverage as the incremental volume shipped through our automated FCs absorbed more of the incremental fixed carry costs of those facilities. In addition to these gains, corporate overhead scaled by 40 basis points year-over-year as a result of our disciplined management of G&A spend and tight cost controls. At the same time that we are scaling our base costs, we continue to invest in the future. This includes the upfront investment we began making in the second half of 2021 and the personnel and technology needed to support the growth and profitability initiatives that we have detailed for you on this and prior calls. This contributed approximately 90 basis points of deleveraging in Q3, which is a 20 basis point sequential improvement from the deleveraging that we saw in the second quarter. As a reminder, while the growth-driving investments we make show up in our SG&A expenses today, the benefits will be realized over time through incremental top-line growth and gross margin expansion. Third quarter advertising and marketing expense was $177.1 million, or 7% of net sales, a 20 basis point increase over the third quarter of 2021 and a 110 basis point sequential increase compared to the second quarter of 2022. As we have said before, our marketing investments are ROI-driven and may fluctuate from quarter to quarter depending on market conditions. In Q3, we saw the opportunity to make incremental investments across a full spectrum of marketing channels, and we leaned into those opportunities to maximize long-term gains in terms of active customers and top-line growth. Overall, our marketing spend remained within the 5%-7% of net sales range that we articulated on our last call. Wrapping up the income statement, third quarter net income was $2.3 million, a year-over-year increase of $34.6 million. Net margin expanded 160 basis points to 0.1%. Third quarter adjusted EBITDA increased to $70.4 million, and our adjusted EBITDA margin expanded 250 basis points to 2.8%, which we believe clearly demonstrates the operating leverage that we are unlocking as we realize the benefits of higher gross margin and accelerated scaling of SG&A expenses. Moving on to free cash flow. Third quarter free cash flow was $69.8 million, reflecting $117.4 million in cash flow from operating activities and $47.6 million of CapEx. Capital investments were primarily comprised of investments in our automated FC in Reno and ongoing technology projects. We finished the quarter with $675 million in cash and cash equivalents and marketable securities, which is $68 million higher than our cash and cash equivalents balance at the end of last quarter. This quarter, you will notice that our balance sheet includes $297 million of marketable securities. Starting in Q3, we took advantage of rising short-term interest rates to redeploy excess cash from overnight deposits into highly liquid commercial paper and short-term treasury bills. At the end of Q3, we remained debt-free, and between cash on hand, marketable securities, and our availability on our ABL, our liquidity currently stands at over $1.1 billion. That concludes my third quarter recap. Now let me cover our fourth quarter and full year 2022 guidance. As 2022 winds down, the resilience of consumer spending in the pet category continues, and Chewy's value proposition remains as compelling as ever. Our current outlook for the balance of 2022 assumes no material change from current trends in the macro environment. We are increasing our full year 2022 guidance to incorporate our Q3 results and a tighter range of expectations for Q4. We're also raising our full year adjusted EBITDA guidance to reflect our gross margin and leverage in SG&A as reported through the third quarter. We expect fourth quarter net sales to be between $2.63 billion and $2.65 billion, representing year-over-year growth of approximately 10%-11%. We are raising our full year 2022 net sales outlook to a range of $10.02 billion-$10.04 billion, representing year-over-year growth of approximately 13% and over $1.1 billion in absolute dollar growth compared to 2021. We're also raising our full year 2022 adjusted EBITDA margin outlook to a range of 2.3%-2.4%, up from our prior range of 1.75%-2%. As you update your models, here are a few housekeeping items to keep in mind. We now expect full year 2022 gross margin to expand by approximately 90 to 100 basis points from our full year 2021 gross margin of 26.7%. While we expect Q4 gross margin to improve year-over-year, it is likely to come in somewhat below Q3 due to seasonal factors like higher promotional activity and fewer opportunities to achieve freight and shipping efficiencies amid higher holiday volumes and peak season surcharges. In terms of CapEx, year-to-date CapEx is running at 2.3% of net sales. As we articulated on prior calls, the higher CapEx this year reflects a pull forward of payments on our next round of FC projects given longer project lead times. We now expect full year 2022 CapEx will come in slightly below our previous expectation of 2.5% of net sales as some anticipated spending shifts into 2023. We now expect to generate approximately $50 million-$100 million of positive free cash flow in 2022, given our revised profitability and CapEx outlook. Q3 results demonstrate Chewy's ability to expand margins and grow profitability in the current macro environment. This is a direct result of our sustained track record of making targeted investments in areas that enhance customer experience, grow our top line, expand margins, and improve free cash flow. We believe our unwavering customer centricity, combined with our sharp operational execution, will enable us to continue extending our industry-leading position in pet. With that, I'll turn the call over to the operator for questions. Thank you, sir. This will now begin the question and answer session of today's call. If you would like to ask a question, again, it is star one on your telephone keypad. If for any reason you would like to remove that question, it is star two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We would also like to ask the participants to limit themselves to one question and one follow-up question. Our first question comes from the line of one Doug Anmuth with JPMorgan. Sir, the floor is yours. Thank you. Thank you for taking the questions. I have two. Just, I guess first on the 4Q revenue, can you just talk about the deceleration versus 3Q, and if there's anything in particular driving that or anything that you're seeing in terms of trends, quarter to date or during the holidays? Then, second, the accelerated scaling of SG&A expenses, where do you think you're seeing the biggest gains, across warehouses and automation and just overall logistics? Thank you. Hey, Doug, it's Mario. I'll start off with the Q4 guidance. As you heard us say before, our guidance doesn't anticipate, you know. It takes into consideration all the data that we have as of right now. When we look at the fourth quarter, we're considering the fact that hard goods tend to be a bigger piece of the of sales usually in the fourth quarter. Seasonally, Q4 tends to show a little more heavily towards hard goods given the holidays. While we saw some demand firming up in the between Q2 and Q3, generally speaking, demand for that category remains relatively soft compared to non-discretionary demand in things like consumables and healthcare. And it's that, those headwinds produced by that softer, discretionary demand that's likely to keep net sales growth rates below what we saw, for example, in Q3. Also recall that last year, Q4, we got a bit of a boost from the Omicron surge in December and January. That's an impact of higher comps last year regarding Omicron. Now, that all said, look, the midpoint of the fourth quarter guidance is still, it suggests a over $250 million increase year-over-year. The quarter is off to a good start. If you look at the full year, you see that our guidance now for full year 2022 is about 13% growth, over $1.1 billion growth in dollar terms year-over-year, and more than doubling the revenue over the last three years. Hey, Doug, this is Sumit. I'll take the second part of the question. You said what's contributing to accelerated SG&A. You also said logistics. I'll take both. Logistics initiatives are rolling up through gross margin, but I'll explain as I kinda go through. On the SG&A scaling, you know, it's a couple things that are in play here. One, the benefits that we're getting from automation, you know, which we rolled out a couple years ago, are really starting to come through now. If you've heard me talk about kind of a physics analogy in the past, where I said there's a lot of potential energy conserved in the system, which once we start unlocking, turns into kinetic energy, and that's kinda what you're seeing flow through. Basically, you know, the two fulfillment centers that we launched last year are fully ramped. We pushed, you know, nearly a third of our volume or just a little under 30% of our volume through that network. Reno, the third one, is still ramping, we realized half of our 120 basis points leverage through the accelerated ramp of the fulfillment centers. The ramp is also helped by the fact that our inventory positioning is improving, both as a result of our work and as a result of improvement in stock levels. When you do that, you actually create density in the fulfillment centers that allows you to be more productive, and the labor situation has been fairly stable. When you put all of that together, it allows us to leverage our network in a manner that we essentially planned it or built it to begin with. That's the fulfillment center portion. Underneath of that, we're also getting operating leverage as a result of higher basket sizes. As incremental volume flows through, you know, that's the 20 basis point that Mario talked about today. Then third, of course, you know, the G&A component that is built in, you know, strong OpEx management, strong controls on, you know, kind of spending, headcount, you know, travel, relocation. Anything basically that you need to run the company in a disciplined manner, the team is all over that. That all is contributing to SG&A. On the freight and logistics initiatives, there is basically three that we've talked about. One, you know, our work with inventory and positioning allows us to better position inventory. We've gotten inventory in lower zones that allows us to ship, you know, lower distances, that allows us to essentially be more efficient with our shipping costs. Number two, we're also improving package density that allows us to improve, you know, cartonization per order that allows us to extract that benefit. Number three, you know, the Middle Mile initiative is contributing, again, it helps us consolidate orders and deeper inject into carrier networks. four, the work with, you know, our import routing centers allows us to move inventory more effectively. That hits the inbound freight side, which also rolls up to gross margin. As a result of these four, you know, you're seeing us leverage kind of, you know, the cost on the freight side, and the previous comments were relative to the SG&A side. Great. Thank you both. Appreciate that. Sure. Thank you for your question, sir. Our next line of questions comes from the line of one Mark Mahaney with Evercore. Sir, the floor is now yours. Okay. Thank you. Let me try two questions. First, the Sponsored Ads ad revenue opportunity, have you sized the TAM before? Just talk about the which kind of advertisers you would expect this bring onto the platform. In terms of the net active customers, this growth you had this quarter after two quarters of decline, and I know there's a factor here which is kind of moving beyond kind of the COVID cohort a little bit. Should the interpretation be that you've now are kind of at the end of that tunnel and that, you know, you're back to kind of more normalized churn levels across the customer base and as the gross adds, you know, kind of stay high, that we should now expect consistently ongoing growth in net active customers? Thank you. Hey, Mark. I'll take the first one. Mario will take the second one. On Sponsored Ads, since it's just launched and still in beta, we haven't fully kind of, you know, shared the financial benefits. The way we would think about it is we'd compare ourselves to, you know, other companies that run single category, Sponsored Ads in single categories, I think that would become a reference. Then we would also consider the power of the Autoship program that allows us to build, you know, repeat purchase and loyalty into brands, that allows us, kind of a, an ROI which is just different and more powerful than we've seen in the industry. You put those two together, the type of products then kind of lends itself to, you know, consumables, healthcare, you know, all products where you can build loyalty, where there is search demand, where there is direct index on the website. You know, we've seen basically great response from partners from that standpoint right now. We're prioritizing those two. Hey, Mark, on your second question about active customer growth, in the third quarter, you saw that we did increase the active customer count by about 30,000, and up about 100,000 active customer count year-over-year. That was in line with our expectations. You know, the increase really is a result of a small uptick in the number of gross customer adds in the quarter and a small reduction in the number of churned customers. As to your point, we continue to lapse the very large COVID era cohorts that we acquired in 2020 and 2021. You know that, obviously, we don't guide to active customers just as we don't guide to NSPAC. That said, our expectations for active customer growth, going into the fourth quarter remain generally consistent with what we said on prior calls, and that's all reflected in the guidance we provided for sales and the like. Okay. Thank you, Sumit. Thank you, Mario. Mario, congratulations, on the, you know, eight years of great success and execution. Wishing you all the best. Thank you, Mark. Thank you for your question, sir. Our next line of questions comes from the line of one Anna Andreeva with Needham & Company. Ma'am, the floor is now yours. Great. Thank you so much. Good afternoon, guys, and congrats. Great results. Two quick questions from us. On higher pricing, I know you have more of a portfolio approach towards managing that. Just any initial thoughts on how we should think about your price versus unit relationship into 2023 and as you start lapping the price increases implemented this year? Secondly, on advertising, it's fluctuated in the last couple of quarters. Can you talk about what's implied for advertising for the fourth quarter? Should we think the 5%-7% range is still the right level for the business as we look out? Thank you. Hi, Anna. This is Sumit. I'll start, and if Mario has to add anything, he'll jump in here. First of all, pricing and unit growth contributed about equally to sales in Q3. We grew pricing, but we also grew units meaningfully as we moved through Q3. In terms of lapping, you know, like next year, one, you know, obviously this year we've seen increasingly, you know, elevated pricing as we move from Q1 through Q3. The first half of the year, there's still, you know, positive favorable comps to be lapped. That's one. Number two, you know, we are expecting incremental costs, as we've shared in the previous calls. We're expecting incremental cost and therefore, you know, more inflation to be passed through into the industry as we enter 2023. We believe that, you know, that's how the pricing environment will look like as we get out of Q4 into the first half of 2023. Of course, you know, in a similar manner where we're growing units, which is actually structurally different than how industry growth occurred in Q3. In Q3, industry growth occurred primarily on the back of price, but at Chewy, we grew units and price. We expect to do that in Q3 in 2023 as well. Yeah. As to your second part of the question on marketing spend, we would expect Q4 marketing as a% of net sales to be similar to Q3 and for the year to be in that 6%-7% range, given where we are year to date. Thank you for your questions. Our next line of questions comes from the line of one Brian Fitzgerald with Wells Fargo. Your line is now open. Thanks, guys. 30% of the volume handled by the automated FCs, any update or how should we frame up the cost savings that you realize from that? As you ramp FC automation and efficiency, then you drive these logistics improvements across the network, it drives a better user experience, right? Have you seen anything in terms of positive impact on engagement, order frequency, NSPAC as a direct result of what you're doing to the network? Hey, Brian, this is Sumit. The improvement and how do we think about potential there. I think you were asking a cost question. We've seen favorability to the tune of somewhere between 18% and 20%. The volume fulfilled out of the 2G network was roughly 18%-20% cheaper than the volume that we fulfilled from our first one legacy, 1G network. And, two, we're still ramping volume into the third fulfillment center. You know, there's incremental volume leverage that we expect to gain, and we're still continuing to scale our costs. There's incremental, you know, productivity improvement that we would expect from our network. All positive story there. In terms of, you know, the impact that we've seen, you know, we have. I mean, we've seen an acceleration, you know, both in it's reflected in the gross add number. It's also reflected in the reactivation number, you know, as we've improved both our inventory positioning and as we've improved, you know, CX. You know, this is not an exact science, so getting down to specific numbers is a little bit hard. you can clearly see it in the way that our network plays out and our order ship rates, both kind of, net and gross, work out there. yes. Brian, if I can add one more thing. Sure Sumit, here is, if you, if you look at where we are today, you saw us numbers we recounted, or we reported in terms of the benefit we're seeing in SG&A from these three FCs. As a reminder, Reno just opened at the more or less at the end of second quarter, so it's still ramping. There's three FCs, one of which is ramping out of 13. Over the next year, 18 months, we're going to see a couple more FCs open up that are also automated. These are layers of profitability, as we said before, as we get more and more of our volume through these automated facilities over time. Brian, if you add these up, like Reno has, you know, several basis points of improvements to give and it ramps. The next two, you know, we sized it at 30 basis points-50 basis points. We also said there is 20 basis points-30 basis points off FC utilization capacity, which is operating leverage that will get released. When you, when you add the, that kind of improvement, along with the fact that we continue to push more volume and expect lower cost, you know, we're satisfied with the journey so far. There's more to come. Awesome. Sumit, Mario, thank you. Thanks, Brian. Thanks, Brian. Thank you for your questions, sir. Our next line of questions comes from the line of one Corey Grady with Jefferies. Your line is now open. Hi. Thanks for taking my questions. I wanted to follow up on the pricing you're talking about into 2023. Can you say more about what you're hearing from brands and commodity costs and additional pricing and what you're expecting in terms of the magnitude of pricing next year? Then on hard goods, so as we come off the COVID adoption cycle and, you know, start to think about a potential recession in 2023, how are you thinking about a recovery in that segment, and what are the leading indicators you would look at to gauge recovery in hard good demand? Thanks. Sure. Sure. Sure. Pricing conversations, it's early to, you know, define or to put a range on the magnitude. Perhaps we could discuss that on the next earnings call when we have a little more clarity when we meet in March. We are expecting, you know, pricing to start rolling through in the Q1 timeframe. This will actually become more clear as we kind of wrap up the year and get into next year. So far, you know, we're not hearing of multiple rounds of increase, you know, then again, you know, as we get more information, we will definitely pass that on. If you look at 2022, we've had four rounds of cost increases over the last 15 months, starting from Q3 of 2021 through Q3 of 2022. We don't expect, you know, multiple rounds of cost increases coming, but there's certainly incremental cost that needs to pass through the system first half of next year. Your second question on hard goods. The inputs that are driving the hard goods lag essentially are a couple here. One is it's tied directly to the consumers' mindset, the inflationary pressures and consumer mindset to pull back spending from discretionary categories. Two is, you know, refresh cycles on hard goods are typically longer. For example, if you recall the last two years, every bed in America pretty much got a, let's say a bed refresh. You know, every new puppy got a crate, et cetera. You know, these refresh cycles are generally 12 months- 15 months long, and they don't get as refreshed, as quickly refreshed as toys would for example. There's a little bit of that that we have to lap, lapse as we play the kind of timescale here. The third one is, you know, pet household formation. When you look at adoptions and relinquishment, they're basically flat to very slightly down from a year-over-year perspective. As pet household formation returns to normalcy, which again is tied back to the inflationary environment, as these inputs correct themselves, we expect hard goods growth to return to normal. Thank you. Sure. Thank you for your questions, sir. Our next line of questions comes from line of one, Lee Horowitz with Deutsche Bank. Your line is now open. Great. Thanks for the question. Maybe another one on NSPAC. For the quarter, can you help us unpack a bit how much of the NSPAC growth you saw in the quarter was from share of wallet gains versus just general inflationary pass-through and the pricing environment? Then, you know, I know we'll have this conversation next quarter again, but just at a high level, when you think about the path forward for NSPAC growth next year, you'll have some pricing pass-through, but you're obviously copying against a big inflationary year and don't necessarily have, say, a big 2022 cohort that's going to be in that quote, call it rapid phase of NSPAC growth next year. At a high level, how are you thinking about the inputs for NSPAC growth next year? Thanks so much. This is Mario. I'll take that one. I can go on for a while on this, on this answer, but, look, let me kind of preface it with a couple of things. As we mentioned in the prepared remarks, our NSPAC did reach another all-time high in the third quarter at $477. If you take that number back to Q1 2020, that's a 34% increase over the last couple of years. So, significant increase in gain of share of wallet there. The other thing is from a spending perspective, if you're just comparing to customers that have been with us for a long time versus more recent customers, the customers we added during the last couple of years, they're displaying similar spending patterns to customers we acquired prior to the pandemic. What that simply means is that they spend more the longer they stay with us. We've seen that for several years. In fact, we've seen it back to the first cohort as we projected out to today. I mean, the first cohort back in 2011 to today. Also consider that our current NSPAC is, as I said, about $477. If you look at our oldest cohorts, cohort 11, cohort 12, cohort 13, they're spending about $1,000 a year with us. Add that to the fact that 60% of customers today have been with us for three years or less. Think about what that means. There's this long curve that takes you from first year about $150, $200 to about $1,000. On average today, our cohorts are fairly young on a weighted basis, the average NSPAC is $477. There's a tremendous amount of upside potential to how much more share of wallet we can gain over time from those customers. You know, of course, we help drive NSPAC growth by adding new product categories like healthcare. We expand our catalog. Now we have over 100,000 products in our catalog. We also make it easier for customers to discover product and drive more cross-category shopping. All these things that we're doing to continue to gain that share of wallet. Again, if you look back at over the years, cohort after cohort, they have these nice long curves that they spend more with us the longer they stay with us. Sumit, anything you wanna add there? Yeah, I think Mario hit it. I mean, if you look at the business unit level, we have several growth vectors that are still growing to deliver scale and contribute to positive NSPAC development. I mean, if you look at healthcare, that's a rapidly developing $40 billion TAM, and, you know, less than 15%, 20% of our customers are active customers. You know, when you look at private label, there's an opportunity to ramp that up. We just launched fresh and prepared category, which is a high NSPAC driver in itself. Our, you know, premium and specialty businesses have plenty of runway in front of them. On top of this, our B2C and B2B services, such as telehealth or Connect with a Vet, compounding, Practice Hub, shelters, pet insurance, they all remain in nascent stages and early stages. On top of that, new initiatives such as Sponsored Ads, et cetera, these are all early kind of vectors that we believe can really compound, the value proposition that we deliver and capture kind of the full life cycle output of a customer's engagement with our platform. We're, we're super bullish about this. Very helpful. Thank you so much. Sure. Thank you for your question, sir. Our next line of questions comes from the line of one Steven Forbes with Guggenheim. Your line is now open. This is Julio Marquez on for Steven Forbes. Just a quick question on automated FCs. I see you mentioned 30% of the volume was shipped from automated. Any color you can give us on, you know, what that might look like at maturity? Any color you can give on, you know, additional investments either in Reno or additional facilities in, into 2023. Thank you. In terms of additional investments, you know, we've talked about launching two new fulfillment centers, which will launch, you know, in the next 12 months- 15 months. You know, one will definitely hit 2023. 1 might hit towards the end of 2023, perhaps early 2024. In the next 12 months-1 5 months, we've shared with you two more fulfillment center launches, and both of them are automated. In terms of, you know, volume entitlement, of course, you know, by the in nature of the fact that we would have, at that point, 15 fulfillment centers and five of the 15 fulfillment centers would be automated, you know, linearly, we would say 30% of the volume, but we're already there. What you can tell is that we're densifying the region as much as possible to be able to ship or place these fulfillment centers closest to customers and then pack them up with as much volume as possible. If you recall, in one of the previous scripts, we've said we expect, you know, fixed output per throughput per square foot to improve 25%, is the efficiency that these buildings are giving us at, you know, overall 30% improvement in kind of full CPU or full cost per unit, you know, measure. Our goal will be to push as much volume as possible. You know, the constraint there is optimally locating inventory, and of course, corresponding to normal demand distribution that exists in the country. More to come as we continue to scale this. Thank you for your question, sir. Our next line of questions comes from the line of one Eric Sheridan with Goldman Sachs. Your line is now open. Thanks so much for taking the questions. Maybe a two-parter if I can. Compared to what you've seen historically, is there any way to frame or quantify what you're embedding in the forward guidance for promotional activity or competitive intensity in the next quarter over the holiday period versus what you've seen historically? Is there any sense that you might see a different bent to competition in the industry given some of the inflation dynamics and consumer wallet dynamics out there broadly? Thanks so much for the color. Eric, compared to Q3, the promotional environment is elevated in Q4. you know, this is normal seasonal pattern we see every year heading into the holidays. Within context of Q4 itself, we believe the promotional environment remains rational and, more or less in line with what we've seen in previous holiday periods. Looking forward, we don't expect the levels of promotions will intensify beyond the current levels that we're seeing. On your second question, Do we expect competitors to act differently given inflation? the fact that the industry, primarily on the consumables and healthcare side, is MAP, I think it allows, you know, a tremendous discipline in a market. Secondly, supply chains haven't yet fully recovered. In-stock positions are certainly improving, but they're not back, you know, to normal to be able to expect hyperactivity. Third, when you look at hard goods sales that are generally the elastic category, you know, currently there isn't much elasticity to be driven given the consumers' mindset. Plus the inventory there, you know, doesn't act. Like, when you look at the contribution from a contribution point of view, it makes up about 15% of our overall sales. We're a little more insured there from a spend point of view. Thank you for your question, sir. Our next line of questions comes from the line of one Dylan Carden with William Blair. Your line is now open. Thanks a lot. Yeah, just curious if you guys could disaggregate or provide any detail on the other revenue line item. I know there's a couple moving parts there, particularly if you're seeing trade down or any benefit more broadly over the last several quarters, in the private label space and any update on, you know, the partnerships with vets or Practice Hub, sort of how pharmaceuticals are trending? Thanks. Hey, Dylan, this is Mario. I'll take the first part of that. As you know, we don't disaggregate that other line item, other revenue item, but in there, we include not only our pharmacy, but also all of our proprietary brand sales, specialty, meaning anything that is non-dog, non-cat type of product, meaning other pet types. As you would expect, and you saw in the hard goods, I'll give you context rather than specific numbers. As you saw in hard goods, though there was an improvement quarter-over-quarter in the terms of decline, a lot of our sales in the private brand space were gonna be hard goods. Just like we saw with third party, or national brands hard goods, decline year-over-year, you would have expected something similar on the private brand side of things. Our healthcare offerings, our pharmacy, especially, continues to perform really well and to grow faster than the rest of the business. I'll say that. We have not seen trade downs. I think that was part of your question. Your second part of the question was on Practice Hub updates or vet initiatives. Look, we're pleased with the update. Practice Hub, you know, scale is up 30% quarter-over-quarter from the last time we met you. We continue to deepen our presence, our engagement, and our penetration with the vets, you know, and in a positively oriented manner. Connect with a Vet continues to scale well. We're pleased with insurance. We're very early in insurance, so these are generally arcs that, you know, are certainly beyond the one-year mark. These are verticals that we think of in terms of three-year increments, just as we did pharmacy when we launched it back in middle of 2018, 19 timeframe. Overall, we're pleased with the way that we're building out the healthcare ecosystem, and we're bullish about our place in this, in this, TAM. Thanks a lot, guys. Thank you for your question, sir. Our next line of questions comes from the line of one Justin Kleber with Baird. Your line is now open. Hey, good evening. Thanks, guys. Just a follow-up to the question on promotions. If we look at gross margin, you're gonna end this year about four points above 19. Can you help us understand how much margin has benefited over these past three years from this more benign promotional backdrop, just so we can assess, you know, what a normalization in the environment could mean if it does happen, you know, for gross margins in 2023 and beyond? It's immaterial to the gross margin progress that we are showing. Yeah. Any context to add, Mario? Yeah. Yeah. No, I think he's exactly right. I think it's de minimis, and I would say where you see the gross margin improvement over time is everything we've talked about. It is getting into or expanding our higher margin categories, healthcare, hard goods. It is the embedded business getting bigger, gaining the scale. It is gain sharing or the benefits across our entire vendor supply and inbound and outbound. It is all those drivers there, but not promotional environment doesn't really affect it, not materially here. Okay. I guess why is this the big step down implied in 4Q on gross margin? If, you know, there's always a promotional holiday, right? I guess it sounds like there's not a year-over-year change in promotions that you're anticipating this holiday. If it's not been a big benefit, I guess I'm trying to understand why the step down in margin here in 4Q relative to the 28/4 in 3Q. Sequentially, I mean, margins, of course, Q4 is a seasonal period. You know, you would expect increased promotional activity, and we are seeing that. We've seen increased promotional activity as we move sequentially out of Q3 into Q4. On an annual basis, we will be stronger this quarter relative to last quarter, relative to this same quarter last year. Yeah. Between that and the peak surcharges that happen during the holidays, that's expected. We wouldn't have seen that in the third quarter. We would see it more in the fourth quarter. There Got it. ... different drivers there. Exactly. Now, I think maybe. And, and- The other part of your question you didn't ask, and I'll answer it anyways, was if you look at what we're looking at for the full year, we came into this year expecting to be basically, we said, quote, "Broadly in line." We expect to be more or less flat year-over-year on a full year basis, and now we're guiding to a 90 basis points- 100 basis point improvement in the end gross margin. We're seeing certainly a lift there as we go through the year. Got it. Just an unrelated question. You mentioned price, another round of, I guess, cost increases and therefore price increases that need to be pushed through the system. If we eventually enter a period of deflation as input costs decline, how do you guys think about you know, the ability to sustain all this pricing that's been taken here over the past few years, particularly in the consumables category? Thank you. Yeah. Yeah, we think pricing will sustain because most of the pricing is getting translated or applied in the industry through MAP pricing, and MAP prices are generally sticky. You see less variability and therefore more stability at the same time. We expect these to be sticky. All right. Got it. Thank you both. Best of luck in the holidays. Thank you. Thank you for your question, sir. Our next line of questions comes from the line one, Chris Bottiglieri from BNP Paribas. Your line is now open. Hey, guys. Thanks. Take a question. You made a small bolt-on acquisition of Petabyte Technology, in November. Can you talk more about what capabilities this gives you and how this fits into your broader ambitions in the health, pet healthcare space? Sure. Petabyte is a relatively small acquisition of a cloud-based provider of technology solutions for the vet sector that we completed in November. We're excited to welcome the Petabyte team into the Chewy family, and we see significant opportunities associated with adding Petabyte's technology to our broader portfolio of healthcare service offerings. You know, today, there's not much more to comment because it's early stages, and work has just begun, but we look forward to sharing more with you in the quarters to come. Got you. Okay. Thanks. I guess the next question is, can you just talk more about the, I guess the basket size is what you're seeing there. Are you seeing? Like, your basket size has grown. It sounds like discretionary is under pressure, so it's not like you're adding more discretionary. What's driving bigger basket sizes? Are people trading into bigger package sizes in order to save more money per unit because inflation? Or is this just, are you finding more ways to attach like healthcare product and stuff like that, and that's what's driving. Yeah. It's a combination of pricing strength and our complementary, you know, growth on the healthcare side. You know, we've come up with several different complementary products to add to the simple consumables and supplies purchase. As attach rates for, you know, highly discretionary categories such as toys, perhaps is near term impacted, right, the attach for pharma, drugs, you know, other products such as insurance, you know, telehealth, these are all additive to the basket size. Autoships have higher basket sizes than non-Autoship orders, and our Autoship% has continued to increase, so that's a contributor in improving basket sizes as well. This is all in play. Gotcha. Okay. Thank you. Sure. Thank you for your question, sir. Our next line of questions comes from the line of one Seth Basham. Your line is now open, sir. Thanks a lot, good afternoon. My question's on customer acquisition costs. We know that gross customer ads increased 6% sequentially, your advertising and marketing expense increased 23% sequentially. Your CAC was up sharply. Did your LTV expectations on customer additions change that much from last quarter to this quarter to maintain ROI expectations on new customers? Hey, Seth, this is Mario. I'll start off, and maybe Sumit can cover something. You said that our gross adds were up 6% quarter-over-quarter. Expand on that one. I'm trying to make sure that I answer your question correctly. I believe that's what you said in the script and in the shareholder's letter. In the... Yeah, the gross adds. That is both new customers and customer reactivation. It is a combination of both, customers that have lapsed and came back and also gross adds. I wouldn't try to tie the two directly together. We got this question, somewhat similar before on the active customer count increase and comparing that to investments in marketing. I'd say it's, you have to sort of disconnect the two. They're not, they shouldn't be, tightly connected that way. Seth, this is, this is Sumit. We are continuing to see net spend growth, LTV growth. When you look at Q3, there were, you know, multiple areas that the spend actually went in, on top of the increased, you know, CPC or increased ad costs that we see in Q3, which you typically do coming out of a lull in Q2 as you gain, you know, as everybody tries to gain kinda mind share of the consumer, in a current environment where the consumer pool remains shallow. CPCs have continued to increase. But beyond that, we saw, you know, opportunities to invest in three different areas, where we did. First is customer development focused on increasing engagement and expanding net spend. That, that was part of our investment. Number two, reactivating previously churned customers. In Q3, we saw a double-digit year-over-year increase in customer reactivation. Then three, you know, there's always some experimentation and testing that we're doing with new channels that are designed to drive broader reach and awareness of the Chewy brand. You know, positioning that right in front of the holiday season as we gain more traction with customers is just a prudent thing to do. All in all we're, you know, we In the way that we spent the money, we kept it within the 5%- 7% range that we've talked about before, and we were satisfied with the outcome here. Got it. Okay. Your CAC was up sequentially, but in line with your expectations to maintain ROI in the customers you acquired in this quarter relative to last? That's right. Yep. Thank you. Thank you for your question, sir. I would now like to pass the call back to Mr. Sumit Singh for any closing remarks. Thank you all for joining us. Happy holidays and a happy new year. With that, we will conclude today's Chewy third quarter fiscal year 2022 earnings call. Thank you for your participation. You may now disconnect your line.