0001766502-20-000022.txt : 20200910 0001766502-20-000022.hdr.sgml : 20200910 20200910163052 ACCESSION NUMBER: 0001766502-20-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 52 CONFORMED PERIOD OF REPORT: 20200802 FILED AS OF DATE: 20200910 DATE AS OF CHANGE: 20200910 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Chewy, Inc. CENTRAL INDEX KEY: 0001766502 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38936 FILM NUMBER: 201168954 BUSINESS ADDRESS: STREET 1: 1855 GRIFFIN ROAD, SUITE B-42 CITY: DANIA BEACH STATE: FL ZIP: 33004 BUSINESS PHONE: 786-320-7111 MAIL ADDRESS: STREET 1: 1855 GRIFFIN ROAD, SUITE B-42 CITY: DANIA BEACH STATE: FL ZIP: 33004 10-Q 1 chwy-20200802.htm 10-Q chwy-20200802
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2020
or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-38936
chwy-20200802_g1.jpg
CHEWY, INC.
(Exact name of registrant as specified in its charter)
Delaware90-1020167
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1855 Griffin Road, Suite B-428, Dania Beach, Florida
33004
(Address of principal executive offices)(Zip Code)
(786) 320-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.01 per shareCHWYNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
ClassOutstanding as of September 3, 2020
Class A Common Stock, $0.01 par value per share89,291,476
Class B Common Stock, $0.01 par value per share317,338,356


CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended August 2, 2020

TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.




PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning our ability to:
successfully manage risks relating to the spread of coronavirus (also known as COVID-19), including any adverse impacts on our supply chain, workforce, facilities, customer services and operations;
sustain our recent growth rates and manage our growth effectively;
acquire new customers in a cost-effective manner and increase our net sales per active customer;
accurately predict economic conditions, particularly the impact on economic conditions of the spread of COVID-19, and their impact on consumer spending patterns, particularly in the pet products market, and accurately forecast net sales and appropriately plan our expenses in the future;
introduce new products or offerings and improve existing products;
successfully compete in the pet products and services retail industry, especially in the e-commerce sector;
source additional, or strengthen our existing relationships with, suppliers;
negotiate acceptable pricing and other terms with third-party service providers, suppliers and outsourcing partners and maintain our relationships with such entities;
optimize, operate and manage the expansion of the capacity of our fulfillment centers, including risks from the spread of COVID-19 relating to our plans to expand capacity and develop new facilities;
provide our customers with a cost-effective platform that is able to respond and adapt to rapid changes in technology;
maintain adequate cybersecurity with respect to our systems and ensure that our third-party service providers do the same with respect to their systems;
successfully manufacture and sell our own private brand products;
maintain consumer confidence in the safety and quality of our vendor-supplied and private brand food products and hardgood products;
comply with existing or future laws and regulations in a cost-efficient manner;
attract, develop, motivate and retain well-qualified employees; and
adequately protect our intellectual property rights and successfully defend ourselves against any intellectual property infringement claims or other allegations that we may be subject to.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://investor.chewy.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
1



Item 1. Financial Statements (Unaudited)

CHEWY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

As of
August 2,
2020
February 2,
2020
Assets(Unaudited)
Current assets:
Cash and cash equivalents$153,842 $212,088 
Accounts receivable93,776 80,478 
Inventories453,040 317,808 
Due from Parent, net12,350 626 
Prepaid expenses and other current assets20,302 18,789 
Total current assets733,310 629,789 
Property and equipment, net169,636 118,731 
Operating lease right-of-use assets237,191 179,052 
Other non-current assets4,704 4,749 
Total assets$1,144,841 $932,321 
Liabilities and stockholders’ deficit
Current liabilities:
Trade accounts payable$702,603 $683,049 
Accrued expenses and other current liabilities506,537 417,489 
Total current liabilities1,209,140 1,100,538 
Operating lease liabilities261,836 200,439 
Other long-term liabilities51,477 35,318 
Total liabilities1,522,453 1,336,295 
Commitments and contingencies (Note 4)
Stockholders’ deficit:
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of August 2, 2020 and February 2, 2020
  
Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 89,227,335 and 66,445,422 shares issued and outstanding as of August 2, 2020 and February 2, 2020, respectively
893 665 
Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 317,338,356 and 334,922,454 shares issued and outstanding as of August 2, 2020 and February 2, 2020, respectively
3,173 3,349 
Additional paid-in capital1,543,481 1,436,484 
Accumulated deficit(1,925,159)(1,844,472)
Total stockholders’ deficit(377,612)(403,974)
Total liabilities and stockholders’ deficit$1,144,841 $932,321 

See accompanying Notes to Condensed Consolidated Financial Statements.

2




CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

13 Weeks Ended26 Weeks Ended
August 2,
2020
August 4,
2019
August 2,
2020
August 4,
2019
Net sales$1,699,859 $1,153,545 $3,321,252 $2,262,417 
Cost of goods sold1,266,503 881,310 2,509,187 1,736,292 
Gross profit433,356 272,235 812,065 526,125 
Operating expenses:
Selling, general and administrative343,181 244,563 663,238 426,460 
Advertising and marketing122,446 110,752 228,584 213,015 
Total operating expenses465,627 355,315 891,822 639,475 
Loss from operations(32,271)(83,080)(79,757)(113,350)
Interest (expense) income, net(546)204 (930)920 
Loss before income tax provision(32,817)(82,876)(80,687)(112,430)
Income tax provision    
Net loss$(32,817)$(82,876)$(80,687)$(112,430)
Net loss per share attributable to common Class A and Class B stockholders, basic and diluted
$(0.08)$(0.21)$(0.20)$(0.28)
Weighted average common shares used in computing net loss per share attributable to common Class A and Class B stockholders, basic and diluted
404,377 397,387 402,891 395,193 

See accompanying Notes to Condensed Consolidated Financial Statements.


3




CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)

13 Weeks Ended August 2, 2020
Class A and Class B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Deficit
Shares Amount
Balance as of May 3, 2020401,461 $4,015 $1,491,792 $(1,892,342)$(396,535)
Share-based compensation expense  33,151  33,151 
Vesting of share-based compensation awards4,918 49 (49)  
Distribution to Parent187 2 (2)  
Contribution from Parent  325  325 
Tax sharing agreement with Parent  18,264  18,264 
Net loss   (32,817)(32,817)
Balance as of August 2, 2020406,566 $4,066 $1,543,481 $(1,925,159)$(377,612)
13 Weeks Ended August 4, 2019
Class A and Class B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Deficit
Shares Amount
Balance as of May 5, 2019 $ $1,263,715 $(1,621,656)$(357,941)
Issuance of common stock upon initial public offering, net of underwriting discounts, commissions and offering costs5,600 56 110,528  110,584 
Change in capital structure393,000 3,930 (3,930)  
Share-based compensation expense  43,783  43,783 
Contribution from Parent  325  325 
Tax sharing agreement with Parent  3,902  3,902 
Termination of loan from Parent  (79,510) (79,510)
Net loss   (82,876)(82,876)
Balance as of August 4, 2019398,600 $3,986 $1,338,813 $(1,704,532)$(361,733)

See accompanying Notes to Condensed Consolidated Financial Statements.

















4




CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)

26 Weeks Ended August 2, 2020
Class A and Class B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Deficit
Shares Amount
Balance as of February 2, 2020401,368 $4,014 $1,436,484 $(1,844,472)$(403,974)
Share-based compensation expense  75,380  75,380 
Vesting of share-based compensation awards5,011 50 (50)  
Distribution to Parent187 2 (2)  
Contribution from Parent  650  650 
Tax sharing agreement with Parent  31,019  31,019 
Net loss   (80,687)(80,687)
Balance as of August 2, 2020406,566 $4,066 $1,543,481 $(1,925,159)$(377,612)
26 Weeks Ended August 4, 2019
Class A and Class B Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Deficit
Shares Amount
Balance as of February 3, 2019 $ $1,256,160 $(1,592,102)$(335,942)
Issuance of common stock upon initial public offering, net of underwriting discounts, commissions and offering costs5,600 56 110,528  110,584 
Change in capital structure393,000 3,930 (3,930)  
Share-based compensation expense  51,013  51,013 
Contribution from Parent  650  650 
Tax sharing agreement with Parent  3,902  3,902 
Termination of loan from Parent  (79,510) (79,510)
Net loss   (112,430)(112,430)
Balance as of August 4, 2019398,600 $3,986 $1,338,813 $(1,704,532)$(361,733)

See accompanying Notes to Condensed Consolidated Financial Statements.
5




CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

26 Weeks Ended
August 2,
2020
August 4,
2019
Cash flows from operating activities
Net loss$(80,687)$(112,430)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization15,336 14,579 
Share-based compensation expense75,380 51,013 
Non-cash lease expense11,082 8,964 
Other216 2,002 
Net change in operating assets and liabilities:
Accounts receivable(13,298)(11,257)
Inventories(135,232)(67,300)
Prepaid expenses and other current assets(2,010)(20,439)
Other non-current assets(99)(2,002)
Trade accounts payable19,554 54,027 
Accrued expenses and other current liabilities92,650 55,536 
Operating lease liabilities (7,196)(3,488)
Other long-term liabilities16,159 1,461 
Net cash used in operating activities(8,145)(29,334)
Cash flows from investing activities
Capital expenditures(69,723)(24,163)
Cash advances provided to Parent, net of reimbursements(3,918)1,018 
Net cash used in investing activities(73,641)(23,145)
Cash flows from financing activities
Proceeds from tax sharing agreement with Parent23,213  
Proceeds from initial public offering, net of underwriting discounts, commissions and offering costs 115,228 
Payment of debt issuance costs (781)
Contribution from Parent650 650 
Principal repayments of finance lease obligations(323)(105)
Net cash provided by financing activities23,540 114,992 
Net (decrease) increase in cash and cash equivalents(58,246)62,513 
Cash and cash equivalents, as of beginning of period212,088 88,331 
Cash and cash equivalents, as of end of period$153,842 $150,844 
Supplemental disclosures on non-cash investing and financing activities:
Offering costs included in accrued expenses and other current liabilities$ $4,644 

See accompanying Notes to Condensed Consolidated Financial Statements.
6



CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.Description of Business

Chewy, Inc. and its wholly-owned subsidiaries (collectively “Chewy” or the “Company”) is a pure play e-commerce business geared toward pet products for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy serves its customers through its retail website, www.chewy.com, and its mobile applications and focuses on delivering exceptional customer service, competitive prices, outstanding convenience (including Chewy’s Autoship subscription program, fast shipping, and hassle-free returns), and a large selection of high-quality pet food, treats and supplies, and pet healthcare products.

The Company is controlled by PetSmart, Inc. (“PetSmart” or the “Parent”). PetSmart is wholly-owned by a consortium including private investment funds advised by BC Partners, La Caisse de dépôt et placement du Québec, affiliates of GIC Special Investments Pte Ltd, affiliates of StepStone Group LP and funds advised by Longview Asset Management, LLC (collectively, the “Sponsors”), and controlled by affiliates of BC Partners.

Initial Public Offering

On June 18, 2019, the Company closed its initial public offering (“IPO”), in which it issued and sold 5.6 million shares of its Class A common stock. The price at IPO was $22.00 per share. The Company received net proceeds of approximately $110.3 million from the IPO after deducting underwriting discounts and commissions of $6.2 million and offering costs.

Prior to the completion of the IPO, the Company amended and restated its certificate of incorporation to authorize Class A and Class B common stock and reclassify the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock. In connection with the IPO, 47,875,000 shares of the Company’s Class B common stock were reclassified into shares of Class A common stock on a one-to-one basis. Upon completion of the IPO, 53,475,000 shares of the Company’s Class A common stock and 345,125,000 shares of Class B common stock were outstanding. The Class A common stock outstanding includes the shares issued in the IPO.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes include the accounts of Chewy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements and notes thereto of Chewy, Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”) accounting standards codification. In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the quarterly period ended August 2, 2020 are not necessarily indicative of the results for the entire fiscal year. The unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2020 (“10-Q Report”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2020 (“10-K Report”).

Fiscal Year

The Company has a 52 or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. The Company’s 2020 fiscal year ends on January 31, 2021 and is a 52-week year. The Company’s 2019 fiscal year ended February 2, 2020 and was a 52-week year.

Significant Accounting Policies

There have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the 10-K Report.
7



Use of Estimates

GAAP requires management to make certain estimates, judgments, and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments. Actual results could differ from those estimates.

Key estimates relate primarily to determining the net realizable value and demand for inventory, useful lives associated with property and equipment, valuation allowances with respect to deferred tax assets, contingencies, evaluation of sales tax positions, and the valuation and assumptions underlying share-based compensation. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Accrued Expenses and Other Current Liabilities

The following table presents the components of accrued expenses and other current liabilities (in thousands):

As of
August 2,
2020
February 2,
2020
Outbound fulfillment$273,236 $182,589 
Advertising and marketing82,194 96,836 
Accrued expenses and other151,107 138,064 
Total accrued expenses and other current liabilities$506,537 $417,489 

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. In August 2018, the FASB issued this Accounting Standards Update (“ASU”) to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update became effective at the beginning of the Company’s 2020 fiscal year. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued this ASU to amend the current accounting guidance which requires the measurement of all expected losses to be based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected loss model that reflects probable losses rather than the incurred loss model for recognizing credit losses. This update became effective at the beginning of the Company’s 2020 fiscal year. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued this ASU to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This ASU also clarifies and simplifies other aspects of the accounting for income taxes. This update is effective at the beginning of the Company’s 2021 fiscal year, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.




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3. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):

As of
August 2, 2020February 2, 2020
Furniture, fixtures and equipment$80,126 $65,329 
Computer equipment37,245 32,259 
Internal-use software42,352 30,222 
Leasehold improvements41,039 39,447 
Finance lease assets3,067 2,565 
Construction in progress50,580 18,927 
254,409 188,749 
Less: accumulated depreciation and amortization84,773 70,018 
Property and equipment, net$169,636 $118,731 

Internal-use software includes labor and license costs associated with software development for internal use. As of August 2, 2020 and February 2, 2020, the Company had accumulated amortization related to internal-use software of $18.5 million and $15.9 million, respectively.

Construction in progress is stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.

For the thirteen weeks ended August 2, 2020 and August 4, 2019, the Company recorded depreciation expense on property and equipment of $6.6 million, and $5.2 million, respectively, and amortization expense related to internal-use software costs of $1.4 million, and $2.5 million, respectively. For the twenty-six weeks ended August 2, 2020 and August 4, 2019, the Company recorded depreciation expense on property and equipment of $12.7 million, and $10.2 million, respectively, and amortization expense related to internal-use software costs of $2.6 million, and $4.4 million, respectively. The aforementioned depreciation and amortization expenses were included within selling, general and administrative expenses in the condensed consolidated statements of operations.

4. Commitments and Contingencies

As of August 2, 2020, there were no material changes to the Company’s legal matters disclosed in Note 4 of the “Notes to Consolidated Financial Statements” included in the 10-K Report.

5. Debt

ABL Credit Facility

The Company has a five-year senior secured asset-backed credit facility (the “ABL Credit Facility”) which provides for non-amortizing revolving loans in an aggregate principal amount of up to $300 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $100 million, subject to customary conditions. The Company is required to a pay commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility. As of August 2, 2020, the Company had no outstanding borrowings under the ABL Credit Facility.







9



6. Leases

The Company leases all of its fulfillment and customer service centers and corporate offices under non-cancelable operating lease agreements. The terms of the Company’s real estate leases generally range from 5 to 15 years and typically allow for the leases to be renewed for up to three additional five-year terms. Fulfillment and customer service centers and corporate office leases, including exercised renewal options, expire at various dates through 2037. The Company also leases certain equipment under operating and finance leases. The terms of equipment leases generally range from 3 to 5 years and do not contain renewal options. These leases expire at various dates through 2024.

The Company’s finance leases as of August 2, 2020 and February 2, 2020 were not material. The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):

As of
LeasesBalance Sheet ClassificationAugust 2, 2020February 2, 2020
Assets
OperatingOperating lease right-of-use assets$237,191 $179,052 
Total operating lease assets$237,191 $179,052 
Liabilities
Current
OperatingAccrued expenses and other current liabilities$15,737 $15,491 
Non-current
OperatingOperating lease liabilities261,836 200,439 
Total operating lease liabilities$277,573 $215,930 

For the twenty-six weeks ended August 2, 2020 and August 4, 2019, assets acquired in exchange for new operating lease liabilities were $67.6 million and $26.8 million, respectively. Lease expense primarily related to operating lease costs. Lease expense for the thirteen weeks ended August 2, 2020 and August 4, 2019 was $14.9 million and $11.9 million, respectively. Lease expense for the twenty-six weeks ended August 2, 2020 and August 4, 2019 was $28.3 million and $22.9 million, respectively. The aforementioned lease expense was included within selling, general and administrative expenses in the condensed consolidated statements of operations.

Operating cash flows related to cash paid for operating leases were approximately $21.7 million and $17.3 million for the twenty-six weeks ended August 2, 2020 and August 4, 2019, respectively.

On August 12, 2020, the Company finalized agreements with a local government agency for certain ad valorem tax benefits provided to the Company in connection with a maximum capital investment of $70 million in property, plant, and equipment purchases for a new fullfillment center over a three-year timeframe. To facilitate the incentives, the government agency will issue its Taxable Industrial Development Revenue Bonds, Series 2020 (the “Bonds”), in a maximum aggregate principal amount of $70 million. In exchange for the Bonds, the Company will convey the purchased equipment to the local government agency and will lease the equipment from this agency. The Company will not pay any cash for the Bonds nor receive any cash for the conveyance of the equipment. Upon termination of the lease, including early termination, the equipment will be conveyed to the Company for a nominal fee.

7. Share-Based Compensation

2019 Omnibus Incentive Plan

In June 2019, the Company’s board of directors adopted and approved the 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on June 13, 2019 and allows for the issuance of up to 31,864,865 shares of Class A common stock. No awards may be granted under the 2019 Plan after June 2029.

The 2019 Plan provides for the grant of stock options, including incentive stock options, non-qualified stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, other incentive awards, stock appreciation rights, and cash awards (collectively “awards”). The awards may be granted to the Company’s employees, consultants, and directors, and the employees and consultants of the Company’s affiliates and subsidiaries.
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Service and Performance-Based Awards

Beginning in June 2019, the Company granted restricted stock units that vest upon satisfaction of both a service-based vesting condition and a performance-based vesting condition (“PRSUs”) as described below.

The service-based vesting condition was satisfied with respect to 25% of an employee’s PRSUs on the first anniversary of the registration date (as defined in the 2019 Plan) and will then be satisfied with respect to 12.5% of an employee’s PRSUs at the end of each six month period thereafter, subject to the employee’s continued employment with the Company through the applicable vesting date.

The performance-based vesting condition shall be satisfied with respect to a percentage of an employee’s PRSUs, as and when the price per share of Class A common stock specified is achieved, on a volume adjusted weighted-average basis, on every trading day during a consecutive 45-trading day period completed prior to the fifth anniversary of the 2019 Plan’s effective date subject to the employee’s continued employment with the Company through the applicable vesting date. As of June 13, 2020, the performance-based vesting condition was fully satisfied.

Service-Based Awards

During the twenty-six weeks ended August 2, 2020, the Company granted restricted stock units with a service-based vesting condition (“RSUs”). The service-based vesting condition will be satisfied with respect to 25% of an employee’s RSUs on the one-year anniversary of the vesting commencement date and 12.5% of an employee’s RSUs at the end of each six month period thereafter, subject to the employee’s continued employment with the Company through the applicable vesting date. The Company records share-based compensation expense for RSUs on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur.

Service and Performance-Based Awards Activity

The following table summarizes the activity related to the Company’s PRSUs for the twenty-six weeks ended August 2, 2020 (in thousands, except for weighted average grant date fair value):

Number of PRSUsWeighted Average Grant Date Fair Value
Outstanding as of February 2, 202021,284 $36.20 
Granted805 $32.30 
Vested(5,207)$36.69 
Forfeited(714)$34.91 
Unvested and outstanding as of August 2, 202016,168 $35.90 

The total fair value of PRSUs that vested during the twenty-six weeks ended August 2, 2020 was $254.0 million. As of August 2, 2020, total unrecognized compensation expense related to unvested PRSUs was $132.1 million and is expected to be recognized over a weighted-average expected performance period of 1.9 years.

During the twenty-six weeks ended August 2, 2020, vesting occurred for 186,617 PRSUs previously granted to a director of the Company. For accounting purposes, the issuance of Class A common stock upon vesting of these PRSUs is treated as a distribution to the Parent because such director is an employee of the Parent.

The fair value of the PRSUs with share price hurdles was determined on the date of grant using a Monte Carlo model to simulate total stockholder return for the Company and peer companies with the following assumptions:

Performance period5 years
Weighted-average risk-free interest rate1.8%
Weighted-average volatility49.7%
Weighted-average dividend yield%

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The risk-free interest rate utilized is based on a 5-year term-matched zero-coupon U.S. Treasury security yield at the time of grant. Expected volatility is based on historical volatility of the stock of the Company’s peer firms. 

Service-Based Awards Activity

The following table summarizes the activity related to the Company’s RSUs for the twenty-six weeks ended August 2, 2020 (in thousands, except for weighted average grant date fair value):
Number of RSUsWeighted Average Grant Date Fair Value
Outstanding as of February 2, 2020 $ 
Granted464 $37.76 
Forfeited(12)$33.31 
Unvested and outstanding as of August 2, 2020452 $37.88 

As of August 2, 2020, total unrecognized compensation expense related to unvested RSUs was $15.9 million and is expected to be recognized over a weighted-average expected performance period of 3.6 years.

The fair value for RSUs is established based on the market price of the Company’s Class A common stock on the date of grant.

As of August 2, 2020, there were 7.3 million additional shares of Class A common stock reserved for future issuance under the 2019 Plan.

Citrus Profits Interest Plan

Subsequent to the PetSmart Acquisition, the Company’s share-based compensation included profits interests units (“PIUs”) granted by Citrus Intermediate Holdings L.P. (the “Citrus Partnership”), a Delaware limited partnership (the “Citrus Profits Interest Plan”). The Citrus Partnership is a parent company of PetSmart and a wholly-owned subsidiary of the Sponsors. The Company recognizes share-based compensation as equity contributions from the Citrus Partnership in its condensed consolidated financial statements for awards granted under the Citrus Profits Interest Plan as it relates to grantees’ services as employees of the Company.

As of June 13, 2019, an aggregate of 768,785 profits interests units under the Citrus Profits Interest Plan were held by employees of Chewy, Inc. and were canceled.

Share-Based Compensation Expense

Share-based compensation expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognized share-based compensation expense as follows (in thousands):

13 Weeks Ended26 Weeks Ended
August 2,
2020
August 4,
2019
August 2,
2020
August 4,
2019
PRSUs$32,138 $40,848 $74,148 $40,848 
RSUs1,013  1,232  
PIUs 2,935  10,165 
Total share-based compensation expense$33,151 $43,783 $75,380 $51,013 





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8. Income Taxes

Subsequent to the PetSmart Acquisition, the Company’s losses were included with PetSmart’s consolidated U.S. federal and state income tax returns. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared on the separate return method as if the Company were a taxpayer separate from PetSmart.

The Company did not have a net current or deferred provision for income taxes for any taxing jurisdiction during the thirteen and twenty-six weeks ended August 2, 2020 and August 4, 2019.

Concurrent with the IPO, the Company and PetSmart entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company and PetSmart with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, local, and foreign income taxes. During the thirteen and twenty-six weeks ended August 2, 2020, the Company recorded a $18.3 million and $31.0 million due from Parent pursuant to the tax sharing agreement, respectively.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, made tax law changes to provide financial relief to companies as a result of the business impacts of COVID-19. Key income tax provisions of the CARES Act include changes in net operating loss carryback and carryforward rules, acceleration of alternative minimum tax credit recovery, increase in the net interest expense deduction limit and charitable contribution limit, and immediate write-off of qualified improvement property. The changes are not expected to have a significant impact on the Company.

9. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders is presented using the two class method required for participating securities. Under the two class method, net loss attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings for the periods presented are calculated as net loss less distributed earnings.

Basic and diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average shares outstanding during the period. The weighted-average shares outstanding during the periods presented reflects the reclassification of the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock.

For the thirteen and twenty-six weeks ended August 2, 2020 and August 4, 2019, the Company’s basic and diluted net loss per share attributable to common Class A and Class B stockholders are the same because the Company has generated a net loss to common stockholders and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact. The computation of diluted net loss per share attributable to common stockholders does not include 16.6 million and 21.2 million potential common shares for the thirteen and twenty-six weeks ended August 2, 2020 and August 4, 2019, respectively, as the effect of their inclusion would have been antidilutive.

Conversion of Class B Common Stock

On May 8, 2020, Buddy Chester Sub LLC, a wholly-owned subsidiary of PetSmart, converted 17,584,098 shares of the Company’s Class B common stock into Class A common stock. On May 11, 2020, Buddy Chester Sub LLC entered into a variable forward purchase agreement to deliver up to 17,584,098 shares of the Company’s Class A common stock at the exchange date, which is expected to be May 16, 2023, determined by reference to the trading price of the common stock at that time.

10. Certain Relationships and Related Party Transactions

The Company’s condensed consolidated financial statements include management fee expenses of $0.3 million and $0.7 million allocated to the Company by the Parent for organizational oversight and certain limited corporate functions provided by its sponsors for the thirteen and twenty-six weeks ended August 2, 2020 and August 4, 2019, respectively. Allocated costs are included within selling, general and administrative expenses in the condensed consolidated statements of operations.


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Certain of the Company’s pharmacy operations are currently, and have been since launch on July 2, 2018, conducted through a wholly-owned subsidiary of PetSmart. The Company has entered into a services agreement with PetSmart that provides for the payment of a management fee due from PetSmart with respect to this arrangement. The Company recognized $9.9 million and $21.6 million during the thirteen and twenty-six weeks ended August 2, 2020 within net sales in the condensed consolidated statements of operations for the services provided compared to $10.9 million and $21.5 million during the thirteen and twenty-six weeks ended August 4, 2019.

PetSmart Guarantees

PetSmart currently provides a guarantee of payment with respect to certain equipment and other leases that the Company has entered into and serves as a guarantor in respect of the Company’s obligations under a credit insurance policy in favor of certain of the Company’s current or future suppliers.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2020 (“10-Q Report”) and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for fiscal year ended February 2, 2020 (“10-K Report”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries. 

Investors and others should note that we may announce material information to our investors using our investor relations website (https://investor.chewy.com/), Securities and Exchange Commission (the “SEC”) filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.

Overview

We are the largest pure-play pet e-tailer in the United States, offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and around-the-clock convenience that only e-commerce can offer. We believe that we are the preeminent online destination for pet parents as a result of our broad selection of high-quality products, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and continually develop innovative ways for our customers to engage with us. We partner with more than 2,000 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 60,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.

Coronavirus

The coronavirus (also known as COVID-19) pandemic has been a highly disruptive economic and societal event that has affected our business and has had a significant impact on consumer shopping behavior. To serve our pet parents while also providing for the safety and well-being of our team members, we have adapted aspects of our logistics, transportation, supply chain and purchasing processes accordingly. As reflected in the discussion below, early in the outbreak, we saw an acceleration in sales as concerned pet parents stocked up on necessities such as food and other essentials. Later, as shelter-in-place orders expanded and social distancing protocols took hold, customers began to shift more of their total shopping spend to online channels. More recently, shelter-in-place orders have been lifted in most areas, however, the migration of consumer spending towards e-commerce channels continues.

As this crisis has unfolded, we have continued to monitor conditions and adapt our operations to meet federal, state and local standards. We have done so to continue meeting the needs of our rapidly growing community of pets and pet parents and to ensure the safety and well-being of our team members. We cannot predict the duration or severity of COVID-19 or its ultimate impact on the broader economy or our operations and liquidity. As such, the situation remains unpredictable and risks still remain. Please refer to the “Cautionary Note Regarding Forward-Looking Statements” in this 10-Q Report and the “Risk Factors” disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2020.

Fiscal Year End

We have a 52 or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. Our 2020 fiscal year ends on January 31, 2021 and is a 52-week year. Our 2019 fiscal year ended February 2, 2020 and was a 52-week year.





15



Key Financial and Operating Data

We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.

13 Weeks Ended26 Weeks Ended
(in thousands, except net sales per active customer and percentages)August 2,
2020
August 4,
2019
% ChangeAugust 2,
2020
August 4,
2019
% Change
Financial and Operating Data
Net sales$1,699,859 $1,153,545 47.4 %$3,321,252 $2,262,417 46.8 %
Net loss (1)
$(32,817)$(82,876)60.4 %$(80,687)$(112,430)28.2 %
Net margin (1)
(1.9)%(7.2)%(2.4)%(5.0)%
Adjusted EBITDA(2)
$15,458 $(29,183)153.0 %$18,901 $(44,949)142.0 %
Adjusted EBITDA margin(2)
0.9 %(2.5)%0.6 %(2.0)%
Net cash provided by (used in) operating activities$(28,890)$21,807 (232.5)%$(8,145)$(29,334)72.2 %
Free cash flow(2)
$(56,035)$9,866 (668.0)%$(77,868)$(53,497)(45.6)%
Active customers16,579 12,021 37.9 %16,579 $12,021 37.9 %
Net sales per active customer$356 $352 1.1 %$356 $352 1.1 %
Autoship customer sales$1,161,603 $799,618 45.3 %$2,262,792 $1,543,471 46.6 %
Autoship customer sales as a percentage of net sales68.3 %69.3 %68.1 %68.2 %
(1) Includes share-based compensation expense, including related taxes, of $37.8 million and $80.1 million for the thirteen and twenty-six weeks ended August 2, 2020 compared to $43.8 million and $51.0 million for the thirteen and twenty-six weeks ended August 4, 2019.
(2) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures.

We define net margin as net loss divided by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this
10-Q Report adjusted EBITDA, a non-GAAP financial measure that we calculate as net loss excluding depreciation and amortization; share-based compensation expense and related taxes; income tax provision; interest income (expense), net; management fee expense; transaction and other costs. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this 10-Q Report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

We believe it is useful to exclude non-cash charges, such as depreciation and amortization, share-based compensation expense and management fee expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; and transaction and other costs as these items are not components of our core business operations. Adjusted EBITDA has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;
16



adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy;
adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;
adjusted EBITDA does not reflect transaction and other costs which are generally incremental costs that result from an actual or planned transaction and include transaction costs (i.e. IPO costs), integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including various cash flow metrics, net loss, net margin, and our other GAAP results.

The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated.

($ in thousands, except percentages)13 Weeks Ended26 Weeks Ended
Reconciliation of Net Loss to Adjusted EBITDAAugust 2,
2020
August 4,
2019
August 2,
2020
August 4,
2019
Net loss$(32,817)$(82,876)$(80,687)$(112,430)
Add (deduct):
Depreciation and amortization8,083 7,630 15,336 14,579 
Share-based compensation expense and related taxes37,797 43,783 80,138 51,013 
Interest expense (income), net546 (204)930 (920)
Management fee expense(1)
325 325 650 650 
Transaction related costs 1,396  1,396 
Other1,524 763 2,534 763 
Adjusted EBITDA$15,458 $(29,183)$18,901 $(44,949)
Net sales$1,699,859 $1,153,545 $3,321,252 $2,262,417 
Net margin(1.9)%(7.2)%(2.4)%(5.0)%
Adjusted EBITDA margin0.9 %(2.5)%0.6 %(2.0)%
(1) Management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions provided by its sponsors. Although we are not a party to the agreement governing the management fee, this management fee is reflected as an expense in our condensed consolidated financial statements.

Free Cash Flow

To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this 10-Q Report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment, including servers and networking equipment, capitalization of labor related to our website, mobile applications, and software development, and leasehold improvements). We have provided a reconciliation below of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure.

We have included free cash flow in this 10-Q Report because it is an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Free cash flow has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.

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The following table presents a reconciliation of net cash provided by (used in) operating activities to free cash flow for each of the periods indicated.

($ in thousands)13 Weeks Ended26 Weeks Ended
Reconciliation of Net Cash Provided by (Used in) Operating Activities to Free Cash FlowAugust 2,
2020
August 4,
2019
August 2,
2020
August 4,
2019
Net cash provided by (used in) operating activities$(28,890)$21,807 $(8,145)$(29,334)
Deduct:
Capital expenditures(27,145)(11,941)(69,723)(24,163)
Free Cash Flow$(56,035)$9,866 $(77,868)$(53,497)

Free cash flow may be affected in the near to medium term by the timing of capital investments (such as the launch of new fulfillment centers, customer service centers, and corporate offices and purchases of IT and other equipment), fluctuations in our growth and the effect of such fluctuations on working capital, and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.

Key Operating Metrics

Active Customers

As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered, and for whom an order has shipped, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as a key indicator of our growth—acquisition and retention of customers—as a result of our marketing efforts and the value we provide to our customers. The number of active customers has grown over time as we acquired new customers and retained previously acquired customers.

Net Sales Per Active Customer

We define net sales per active customer as the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior.

Autoship and Autoship Customer Sales

We define Autoship customers as customers in a given fiscal quarter for whom an order has shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers), for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.

Autoship Customer Sales as a Percentage of Net Sales

We define Autoship customer sales as a percentage of net sales as the Autoship customer sales in a given reporting period divided by the net sales from all orders in that period. We view Autoship customer sales as a percentage of net sales as a key indicator of our recurring sales and customer retention.

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Components of Results of Consolidated Operations

Net Sales

We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program.

We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.

Cost of Goods Sold

Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.

Selling, General and Administrative

Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs.

Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.

Advertising and Marketing

Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.





















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Results of Consolidated Operations

The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.