Chewy, Inc. - Quarter Report: 2021 October (Form 10-Q)
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 October 31, 2021
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-20211031_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001766502/000176650221000032/chwy-20211031_g1.jpg)
CHEWY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 90-1020167 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
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 class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Class A Common Stock, par value $0.01 per share | CHWY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
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 filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Class | Outstanding as of December 2, 2021 | |||||||
Class A Common Stock, $0.01 par value per share | 106,791,120 | |||||||
Class B Common Stock, $0.01 par value per share | 311,188,356 |
CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended October 31, 2021
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 proprietary brand products;
•maintain consumer confidence in the safety and quality of our vendor-supplied and proprietary 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” in our annual report on Form 10-K for the fiscal year ended January 31, 2021, our subsequent quarterly reports, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that 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 | |||||||||||
October 31, 2021 | January 31, 2021 | ||||||||||
Assets | (Unaudited) | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 726,919 | $ | 563,345 | |||||||
Accounts receivable | 128,713 | 100,699 | |||||||||
Inventories | 606,594 | 513,304 | |||||||||
Prepaid expenses and other current assets | 61,896 | 49,430 | |||||||||
Total current assets | 1,524,122 | 1,226,778 | |||||||||
Property and equipment, net | 317,729 | 210,017 | |||||||||
Operating lease right-of-use assets | 341,900 | 297,213 | |||||||||
Other non-current assets | 11,732 | 6,902 | |||||||||
Total assets | $ | 2,195,483 | $ | 1,740,910 | |||||||
Liabilities and stockholders’ equity (deficit) | |||||||||||
Current liabilities: | |||||||||||
Trade accounts payable | $ | 1,015,684 | $ | 778,365 | |||||||
Accrued expenses and other current liabilities | 703,005 | 602,497 | |||||||||
Total current liabilities | 1,718,689 | 1,380,862 | |||||||||
Operating lease liabilities | 378,625 | 328,231 | |||||||||
Other long-term liabilities | 32,149 | 33,821 | |||||||||
Total liabilities | 2,129,463 | 1,742,914 | |||||||||
Commitments and contingencies (Note 4) | |||||||||||
Stockholders’ equity (deficit): | |||||||||||
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of October 31, 2021 and January 31, 2021 | — | — | |||||||||
Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 106,728,159 and 97,708,518 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | 1,067 | 977 | |||||||||
Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 311,188,356 and 317,338,356 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively | 3,112 | 3,173 | |||||||||
Additional paid-in capital | 2,009,007 | 1,930,804 | |||||||||
Accumulated deficit | (1,947,166) | (1,936,958) | |||||||||
Total stockholders’ equity (deficit) | 66,020 | (2,004) | |||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 2,195,483 | $ | 1,740,910 |
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 Ended | 39 Weeks Ended | ||||||||||||||||||||||
October 31, 2021 | November 1, 2020 | October 31, 2021 | November 1, 2020 | ||||||||||||||||||||
Net sales | $ | 2,212,161 | $ | 1,782,000 | $ | 6,502,375 | $ | 5,103,252 | |||||||||||||||
Cost of goods sold | 1,627,320 | 1,327,442 | 4,734,304 | 3,836,629 | |||||||||||||||||||
Gross profit | 584,841 | 454,558 | 1,768,071 | 1,266,623 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Selling, general and administrative | 466,434 | 352,250 | 1,310,326 | 1,015,488 | |||||||||||||||||||
Advertising and marketing | 150,335 | 134,616 | 466,738 | 363,200 | |||||||||||||||||||
Total operating expenses | 616,769 | 486,866 | 1,777,064 | 1,378,688 | |||||||||||||||||||
Loss from operations | (31,928) | (32,308) | (8,993) | (112,065) | |||||||||||||||||||
Interest expense, net | (313) | (539) | (1,215) | (1,469) | |||||||||||||||||||
Loss before income tax provision | (32,241) | (32,847) | (10,208) | (113,534) | |||||||||||||||||||
Income tax provision | — | — | — | — | |||||||||||||||||||
Net loss | $ | (32,241) | $ | (32,847) | $ | (10,208) | $ | (113,534) | |||||||||||||||
Net loss per share attributable to common Class A and Class B stockholders, basic and diluted | $ | (0.08) | $ | (0.08) | $ | (0.02) | $ | (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 | 417,847 | 409,260 | 416,587 | 405,014 | |||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)
13 Weeks Ended October 31, 2021 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of August 1, 2021 | 417,762 | $ | 4,178 | $ | 1,985,800 | $ | (1,914,925) | $ | 75,053 | ||||||||||||||||||||
Share-based compensation expense | — | — | 18,804 | — | 18,804 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 153 | 1 | (1) | — | — | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | 4,404 | — | 4,404 | ||||||||||||||||||||||||
Net loss | — | — | — | (32,241) | (32,241) | ||||||||||||||||||||||||
Balance as of October 31, 2021 | 417,915 | $ | 4,179 | $ | 2,009,007 | $ | (1,947,166) | $ | 66,020 | ||||||||||||||||||||
13 Weeks Ended November 1, 2020 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of August 2, 2020 | 406,566 | $ | 4,066 | $ | 1,543,481 | $ | (1,925,159) | $ | (377,612) | ||||||||||||||||||||
Issuance of Class A common stock, net of offering costs | 5,865 | 59 | 318,357 | — | 318,416 | ||||||||||||||||||||||||
Share-based compensation expense | — | — | 24,808 | — | 24,808 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 182 | 1 | (1) | — | — | ||||||||||||||||||||||||
Contribution from PetSmart | — | — | 325 | — | 325 | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | 10,489 | — | 10,489 | ||||||||||||||||||||||||
Net loss | — | — | — | (32,847) | (32,847) | ||||||||||||||||||||||||
Balance as of November 1, 2020 | 412,613 | $ | 4,126 | $ | 1,897,459 | $ | (1,958,006) | $ | (56,421) |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)
39 Weeks Ended October 31, 2021 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of January 31, 2021 | 415,046 | $ | 4,150 | $ | 1,930,804 | $ | (1,936,958) | $ | (2,004) | ||||||||||||||||||||
Share-based compensation expense | — | — | 63,688 | — | 63,688 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 2,776 | 28 | (28) | — | — | ||||||||||||||||||||||||
Distribution to parent | 93 | 1 | (1) | — | — | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | 14,544 | — | 14,544 | ||||||||||||||||||||||||
Net loss | — | — | — | (10,208) | (10,208) | ||||||||||||||||||||||||
Balance as of October 31, 2021 | 417,915 | $ | 4,179 | $ | 2,009,007 | $ | (1,947,166) | $ | 66,020 | ||||||||||||||||||||
39 Weeks Ended November 1, 2020 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of February 2, 2020 | 401,368 | $ | 4,014 | $ | 1,436,484 | $ | (1,844,472) | $ | (403,974) | ||||||||||||||||||||
Issuance of Class A common stock, net of offering costs | 5,865 | 59 | 318,357 | — | 318,416 | ||||||||||||||||||||||||
Share-based compensation expense | — | — | 100,188 | — | 100,188 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 5,193 | 51 | (51) | — | — | ||||||||||||||||||||||||
Distribution to parent | 187 | 2 | (2) | — | — | ||||||||||||||||||||||||
Contribution from PetSmart | — | — | 975 | — | 975 | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | 41,508 | — | 41,508 | ||||||||||||||||||||||||
Net loss | — | — | — | (113,534) | (113,534) | ||||||||||||||||||||||||
Balance as of November 1, 2020 | 412,613 | $ | 4,126 | $ | 1,897,459 | $ | (1,958,006) | $ | (56,421) |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
39 Weeks Ended | |||||||||||
October 31, 2021 | November 1, 2020 | ||||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (10,208) | $ | (113,534) | |||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 38,141 | 24,598 | |||||||||
Share-based compensation expense | 63,688 | 100,188 | |||||||||
Non-cash lease expense | 24,467 | 18,020 | |||||||||
Other | 434 | 223 | |||||||||
Net change in operating assets and liabilities: | |||||||||||
Accounts receivable | (28,014) | (17,442) | |||||||||
Inventories | (93,290) | (164,841) | |||||||||
Prepaid expenses and other current assets | (42,462) | (11,581) | |||||||||
Other non-current assets | (3,635) | (204) | |||||||||
Trade accounts payable | 237,319 | 86,385 | |||||||||
Accrued expenses and other current liabilities | 88,010 | 123,232 | |||||||||
Operating lease liabilities | (14,792) | (11,415) | |||||||||
Other long-term liabilities | (1,952) | 21,659 | |||||||||
Net cash provided by operating activities | 257,706 | 55,288 | |||||||||
Cash flows from investing activities | |||||||||||
Capital expenditures | (135,714) | (100,258) | |||||||||
Cash advances provided to PetSmart, net of reimbursements | — | (1,767) | |||||||||
Other | — | (2,000) | |||||||||
Net cash used in investing activities | (135,714) | (104,025) | |||||||||
Cash flows from financing activities | |||||||||||
Proceeds from issuance of common stock, net of offering costs | — | 318,775 | |||||||||
Proceeds from tax sharing agreement with related parties | 43,714 | 23,213 | |||||||||
Payment of debt issuance costs | (1,440) | — | |||||||||
Contribution from PetSmart | — | 975 | |||||||||
Principal repayments of finance lease obligations | (692) | (486) | |||||||||
Net cash provided by financing activities | 41,582 | 342,477 | |||||||||
Net increase in cash and cash equivalents | 163,574 | 293,740 | |||||||||
Cash and cash equivalents, as of beginning of period | 563,345 | 212,088 | |||||||||
Cash and cash equivalents, as of end of period | $ | 726,919 | $ | 505,828 |
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.
During the fiscal year ended January 31, 2021, the Company was controlled by PetSmart LLC (“PetSmart”). 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.
On February 12, 2021, PetSmart completed a refinancing transaction and in connection with such transaction all shares of the Company’s common stock held by PetSmart and its subsidiaries were distributed to affiliates of BC Partners. Subsequent to the distribution, PetSmart no longer directly or indirectly owns any shares of the Company’s common stock.
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 October 31, 2021 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 October 31, 2021 (“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 January 31, 2021 (“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 2021 fiscal year ends on January 30, 2022 and is a 52-week year. The Company’s 2020 fiscal year ended January 31, 2021 and was a 52-week year.
Reclassification
As the Company is no longer a subsidiary of PetSmart, balances due from and due to PetSmart have been included on a net basis within prepaid expenses and other current assets on the condensed consolidated balance sheets; corresponding amounts for prior periods have been reclassified to conform to the current period’s presentation.
Significant Accounting Policies
Other than policies noted herein or within Recent Accounting Pronouncements below, 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, self-insurance accruals, evaluation of sales tax positions, and the valuation and assumptions underlying share-based compensation. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Accrued Expenses and Other Current Liabilities
The following table presents the components of accrued expenses and other current liabilities (in thousands):
As of | |||||||||||
October 31, 2021 | January 31, 2021 | ||||||||||
Outbound fulfillment | $ | 343,076 | $ | 310,700 | |||||||
Advertising and marketing | 105,979 | 85,835 | |||||||||
Payroll liabilities | 59,478 | 72,467 | |||||||||
Accrued expenses and other | 194,472 | 133,495 | |||||||||
Total accrued expenses and other current liabilities | $ | 703,005 | $ | 602,497 |
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1-Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2-Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3-Valuations based on unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The following is a summary of cash and cash equivalents (in thousands):
As of | |||||||||||
October 31, 2021 | January 31, 2021 | ||||||||||
Cash | $ | 475,914 | $ | 563,345 | |||||||
Level 1 securities: | |||||||||||
Money market funds | 43,000 | — | |||||||||
U.S. Treasury securities | 99,997 | — | |||||||||
Certificates of deposit | 33,027 | — | |||||||||
Commercial paper | 74,981 | — | |||||||||
Cash and cash equivalents | $ | 726,919 | $ | 563,345 |
8
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued this Accounting Standards Update (“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 became effective at the beginning of the Company’s 2021 fiscal year. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.
3. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):
As of | |||||||||||
October 31, 2021 | January 31, 2021 | ||||||||||
Furniture, fixtures and equipment | $ | 121,975 | $ | 91,496 | |||||||
Computer equipment | 51,437 | 43,347 | |||||||||
Internal-use software | 87,199 | 56,977 | |||||||||
Leasehold improvements | 140,048 | 80,641 | |||||||||
Construction in progress | 59,238 | 41,914 | |||||||||
459,897 | 314,375 | ||||||||||
Less: accumulated depreciation and amortization | 142,168 | 104,358 | |||||||||
Property and equipment, net | $ | 317,729 | $ | 210,017 |
Internal-use software includes labor and license costs associated with software development for internal use. As of October 31, 2021 and January 31, 2021, the Company had accumulated amortization related to internal-use software of $32.6 million and $22.5 million, respectively.
Construction in progress is stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
For the thirteen weeks ended October 31, 2021 and November 1, 2020, the Company recorded depreciation expense on property and equipment of $10.0 million, and $7.5 million, respectively, and amortization expense related to internal-use software costs of $4.0 million, and $1.8 million, respectively. For the thirty-nine weeks ended October 31, 2021 and November 1, 2020, the Company recorded depreciation expense on property and equipment of $28.0 million, and $20.2 million, respectively, and amortization expense related to internal-use software costs of $10.1 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
Legal Matters
Various legal claims arise from time to time in the normal course of business. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which it is presently a party will have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
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International Business Machines Corporation (“IBM”) previously alleged that the Company is infringing four of its patents. On February 15, 2021, the Company filed a declaration judgment action in the United States District Court for the Southern District of New York against IBM seeking the court’s declaration that the Company is not infringing the four asserted IBM patents. On April 19, 2021, IBM filed an answer with counterclaims, alleging that the Company is infringing the four patents by operation of the Chewy.com website and mobile application, and seeking unspecified damages, including a request that the amount of compensatory damages be trebled, injunctive relief and costs and reasonable attorneys’ fees. The Company filed a motion to dismiss IBM’s claims against three of the asserted patents on May 14, 2021. In response, IBM filed an amended complaint on May 24, 2021 that included an additional assertion that the Company is infringing a fifth IBM patent. On June 14, 2021, the Company filed a motion to dismiss IBM’s claims with respect to four of the asserted patents, which was denied on August 4, 2021. On October 8, 2021, the parties had a claim construction hearing and on November 9, 2021, the claim construction rulings resulted in one of the five patents being eliminated from the case. The parties are proceeding with discovery. The Company continues to deny the allegations of any infringement and intends to vigorously defend itself in this matter. The possible loss or range of loss associated with this matter is not estimable.
5. Debt
ABL Credit Facility
The Company has a senior secured asset-backed credit facility (the “ABL Credit Facility”) which was scheduled to mature in June 2024 and provided 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 provided 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 was required to pay a commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which was generally based on average daily usage of the facility.
On August 27, 2021, the Company amended the ABL Credit Facility to increase the aggregate principal amount to be up to $500 million and increase the amount available for incremental asset-based revolving loan facilities to $300 million. In addition, the amendments resulted in the commitment fee being modified from a range of 0.25% to 0.375% to a fixed 0.25% fee with respect to the undrawn portion of the commitments. The ABL Credit Facility now matures in August 2026. Based on the Company’s borrowing base as of October 31, 2021, which is reduced by standby letters of credit, the Company had $463.3 million of borrowing capacity under the ABL Credit Facility. As of October 31, 2021, the Company had no outstanding borrowings under the ABL Credit Facility.
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 expire at various dates through 2034, excluding renewal options. The Company also leases certain equipment under operating and finance leases. The terms of equipment leases generally range from 3 to 5 years and do not contain renewal options. These leases expire at various dates through 2025.
The Company’s finance leases as of October 31, 2021 and January 31, 2021 were not material and were included in property and equipment on the Company’s condensed consolidated balance sheets.
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The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):
As of | ||||||||||||||||||||
Leases | Balance Sheet Classification | October 31, 2021 | January 31, 2021 | |||||||||||||||||
Assets | ||||||||||||||||||||
Operating | Operating lease right-of-use assets | $ | 341,900 | $ | 297,213 | |||||||||||||||
Total operating lease assets | $ | 341,900 | $ | 297,213 | ||||||||||||||||
Liabilities | ||||||||||||||||||||
Current | ||||||||||||||||||||
Operating | $ | 22,513 | $ | 19,142 | ||||||||||||||||
Non-current | ||||||||||||||||||||
Operating | Operating lease liabilities | 378,625 | 328,231 | |||||||||||||||||
Total operating lease liabilities | $ | 401,138 | $ | 347,373 |
For the thirty-nine weeks ended October 31, 2021 and November 1, 2020, assets acquired in exchange for new operating lease liabilities were $59.2 million and $118.3 million, respectively. Lease expense primarily relates to operating lease costs. Lease expense for the thirteen weeks ended October 31, 2021 and November 1, 2020 was $20.4 million and $16.9 million, respectively. Lease expense for the thirty-nine weeks ended October 31, 2021 and November 1, 2020 was $59.0 million and $45.2 million, respectively. The aforementioned lease expense was included within selling, general and administrative expenses in the condensed consolidated statements of operations.
Cash flows used in operating activities related to operating leases were approximately $49.8 million and $39.1 million for the thirty-nine weeks ended October 31, 2021 and November 1, 2020, respectively.
7. Stockholders’ Equity (Deficit)
Common Stock
2020 Equity Offering
On September 21, 2020, the Company issued and sold 5,100,000 shares of Class A common stock in an underwritten public offering at a price of $54.40 per share to Morgan Stanley & Co. LLC, who acted as sole underwriter in the offering. The Company had granted the underwriter an option to purchase up to an additional 765,000 shares of Class A common stock at a price of $54.40 per share (“Option Shares”), which was exercised on September 30, 2020. The Company raised $318.4 million in net proceeds through the equity offering (including proceeds from the sale of the Option Shares) after deducting offering costs of approximately $0.6 million.
Conversion of Class B Common Stock
On May 8, 2020, Buddy Chester Sub LLC, a wholly-owned subsidiary of Argos Intermediate Holdco I Inc. (“Argos Holdco”), which is controlled by affiliates of BC Partners, 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. The number of shares to be delivered will be determined based on, among other things, the trading price of the Company’s Class A common stock at that time.
On April 12, 2021, Argos Holdco converted 6,150,000 shares of the Company’s Class B common stock into Class A common stock and sold such Class A common stock.
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8. 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.
Service and Performance-Based Awards
The Company grants restricted stock units that vest upon satisfaction of both service-based vesting conditions and company performance or market-based vesting conditions (“PRSUs”), subject to the employee’s continued employment with the Company through the applicable vesting date. The Company records share-based compensation expense for PRSUs over the requisite service period and accounts for forfeitures as they occur.
Service-Based Awards
The Company grants restricted stock units with service-based vesting conditions (“RSUs”) which vest 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 and 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 thirty-nine weeks ended October 31, 2021 (in thousands, except for weighted average grant date fair value):
Number of PRSUs | Weighted Average Grant Date Fair Value | ||||||||||
Outstanding as of January 31, 2021 | 13,011 | $ | 35.95 | ||||||||
Granted | 32 | $ | 80.85 | ||||||||
Vested | (2,676) | $ | 35.70 | ||||||||
Forfeited | (1,075) | $ | 35.16 | ||||||||
Unvested and outstanding as of October 31, 2021 | 9,292 | $ | 36.26 |
The total fair value of PRSUs that vested during the thirty-nine weeks ended October 31, 2021 was $205.6 million. As of October 31, 2021, total unrecognized compensation expense related to unvested PRSUs was $35.3 million and is expected to be recognized over a weighted-average expected performance period of 1.3 years.
During the thirty-nine weeks ended October 31, 2021 and November 1, 2020, vesting occurred for 93,309 and 186,617 PRSUs, respectively, previously granted to an employee of PetSmart. For accounting purposes, the issuance of Class A common stock upon vesting of these PRSUs is treated as a distribution to a parent entity because both the Company and PetSmart are controlled by affiliates of BC Partners.
The fair value of the PRSUs with market-based vesting conditions 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 period | 5 years | ||||
Weighted-average risk-free interest rate | 1.8% | ||||
Weighted-average volatility | 49.7% | ||||
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.
The fair value for PRSUs with a Company performance-based vesting condition is established based on the market price of the Company’s Class A common stock on the date of grant.
Service-Based Awards Activity
The following table summarizes the activity related to the Company’s RSUs for the thirty-nine weeks ended October 31, 2021 (in thousands, except for weighted average grant date fair value):
Number of RSUs | Weighted Average Grant Date Fair Value | ||||||||||
Outstanding as of January 31, 2021 | 713 | $ | 48.58 | ||||||||
Granted | 2,292 | $ | 79.48 | ||||||||
Vested | (190) | $ | 42.74 | ||||||||
Forfeited | (408) | $ | 69.62 | ||||||||
Unvested and outstanding as of October 31, 2021 | 2,407 | $ | 74.97 |
The total fair value of RSUs that vested during the thirty-nine weeks ended October 31, 2021 was $17.2 million. As of October 31, 2021, total unrecognized compensation expense related to unvested RSUs was $149.4 million and is expected to be recognized over a weighted-average expected performance period of 3.1 years.
The fair value for RSUs is established based on the market price of the Company’s Class A common stock on the date of grant.
As of October 31, 2021, there were 6.7 million additional shares of Class A common stock reserved for future issuance under the 2019 Plan.
Share-Based Compensation Expense
Share-based compensation expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognized share-based compensation expense as follows (in thousands):
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||
October 31, 2021 | November 1, 2020 | October 31, 2021 | November 1, 2020 | ||||||||||||||||||||
PRSUs | $ | 5,825 | $ | 22,463 | $ | 29,975 | $ | 96,611 | |||||||||||||||
RSUs | 12,979 | 2,345 | 33,713 | 3,577 | |||||||||||||||||||
Total share-based compensation expense | $ | 18,804 | $ | 24,808 | $ | 63,688 | $ | 100,188 |
9. Income Taxes
Chewy is subject to taxation in the U.S. and various state and local jurisdictions. The Company’s losses and tax attributes were previously included in PetSmart’s consolidated tax return activity at the U.S. federal level and any applicable state and local level. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared based on the separate return method. As of January 31, 2021, Chewy was no longer a member of PetSmart’s affiliated group for U.S. federal income tax purposes. For presentation purposes, during the fiscal year ended January 31, 2021, the Company reduced the deferred tax attributes previously utilized by PetSmart, along with the associated valuation allowances, from the financial statements in order to properly reflect the deferred tax attributes available to the Company; this had no net impact on the Company’s income tax expense.
The Company did not have a current or deferred provision for income taxes for any taxing jurisdiction during the thirteen and thirty-nine weeks ended October 31, 2021, and November 1, 2020. Additionally, the Company maintained a full valuation allowance on its net deferred tax assets.
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Concurrent with its initial public offering during the fiscal year ended February 2, 2020, the Company, PetSmart, and Argos Intermediate Holdco I Inc. (“Argos Holdco”) entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company, PetSmart, and Argos Holdco with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, and local income taxes. During the thirty-nine weeks ended October 31, 2021 and November 1, 2020, the Company collected $43.7 million and $23.2 million, respectively, pursuant to the tax sharing agreement. Though the tax sharing agreement was effectively terminated with PetSmart upon tax deconsolidation for federal income taxes, future settlements will occur upon the filing of final tax returns. Additionally, the Company will continue to receive payments from Argos Holdco upon the filing of certain combined state tax returns for the fiscal year ended January 31, 2021 and thereafter. As of October 31, 2021 and January 31, 2021, the Company had a receivable related to the tax sharing agreement of $1.3 million and $30.5 million, respectively. The outstanding amount is expected to be collected during the fiscal year ended January 30, 2022.
10. 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. Undistributed earnings are allocated proportionally to common Class A and Class B stockholders as both classes are entitled to share equally, on a per share basis, in dividends and other distributions. Basic and diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average shares outstanding during the period.
For the thirteen and thirty-nine weeks ended October 31, 2021 and November 1, 2020, the Company’s calculations of basic and diluted net loss per share attributable to common Class A and Class B stockholders are the same because the Company 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 11.7 million potential common shares for the thirteen and thirty-nine weeks ended October 31, 2021 and 16.4 million potential common shares for the thirteen and thirty-nine weeks ended November 1, 2020, respectively, as the effect of their inclusion would have been antidilutive.
11. Certain Relationships and Related Party Transactions
The Company’s condensed consolidated financial statements include management fee expenses of $0.3 million and $1.0 million allocated to the Company by PetSmart for organizational oversight and certain limited corporate functions provided by its sponsors for the thirteen and thirty-nine weeks ended November 1, 2020, respectively. Allocated costs are included within selling, general and administrative expenses in the condensed consolidated statements of operations.
Since launch on July 2, 2018, certain of the Company’s pharmacy operations have been and continue to be 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 $3.3 million and $23.0 million during the thirteen and thirty-nine weeks ended October 31, 2021 within net sales in the condensed consolidated statements of operations for the services provided compared to $8.6 million and $30.2 million during the thirteen and thirty-nine weeks ended November 1, 2020.
As of October 31, 2021 and January 31, 2021, the Company had a net receivable from PetSmart of $21.1 million and $21.9 million, respectively, which was included in prepaid expenses and other current assets on the Company's condensed consolidated balance sheets.
PetSmart Guarantees
PetSmart previously provided a guarantee of payment with respect to certain equipment and other leases that the Company entered into and served as a guarantor in respect of the Company’s obligations under a credit insurance policy in favor of certain of the Company’s suppliers. As of October 31, 2021, all such guarantees had been released, with the exception of guarantees pertaining to two of the Company’s lease agreements.
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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 October 31, 2021 (“10-Q Report”) and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 (“10-K Report”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein and in our 10-K Report, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries.
Investors and others should note that we may announce material 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 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 2,500 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding proprietary brands. Through our website and mobile applications, we offer our customers more than 75,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
COVID-19
The COVID-19 pandemic has been a disruptive economic and societal event that has affected our business and consumer shopping behavior. 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, we have seen customers shift more of their total shopping spend to online channels since the COVID-19 outbreak, which has led to increased sales and order activity for our business. Labor markets, particularly as they pertain to our fulfillment centers, have been, and remain, challenging. We expect this labor supply and demand imbalance to continue over the near to medium term, resulting in increased competition for personnel. While the COVID-19 outbreak has not had a material adverse impact on our operations to date, and conditions do appear to be improving as vaccination levels rise and state and local economies begin to re-open, the positive or negative impacts that the COVID-19 outbreak will ultimately have on our business remain difficult to predict.
As this crisis unfolded, we monitored conditions closely and adapted our operations to meet federal, state and local standards, while continuing to meet the needs of our rapidly growing community of pets and pet parents and to ensure the safety and well-being of our team members. While conditions appear to be improving, we are still unable to predict the duration of the COVID-19 pandemic and therefore what the ultimate impact of the COVID-19 pandemic will be on the broader economy or our operations and liquidity. As such, 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 January 31, 2021.
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 2021 fiscal year ends on January 30, 2022 and is a 52-week year. Our 2020 fiscal year ended January 31, 2021 and was a 52-week year.
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Key Financial and Operating Data
We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||
(in thousands, except net sales per active customer and percentages) | October 31, 2021 | November 1, 2020 | % Change | October 31, 2021 | November 1, 2020 | % Change | |||||||||||||||||||||||||||||
Financial and Operating Data | |||||||||||||||||||||||||||||||||||
Net sales | $ | 2,212,161 | $ | 1,782,000 | 24.1 | % | $ | 6,502,375 | $ | 5,103,252 | 27.4 | % | |||||||||||||||||||||||
Net loss (1) | $ | (32,241) | $ | (32,847) | 1.8 | % | $ | (10,208) | $ | (113,534) | 91.0 | % | |||||||||||||||||||||||
Net margin (1) | (1.5) | % | (1.8) | % | (0.2) | % | (2.2) | % | |||||||||||||||||||||||||||
Adjusted EBITDA(2) | $ | 6,046 | $ | 5,502 | 9.9 | % | $ | 106,672 | $ | 24,403 | n/m | ||||||||||||||||||||||||
Adjusted EBITDA margin(2) | 0.3 | % | 0.3 | % | 1.6 | % | 0.5 | % | |||||||||||||||||||||||||||
Net cash provided by operating activities | $ | 74,255 | $ | 63,433 | 17.1 | % | $ | 257,706 | $ | 55,288 | n/m | ||||||||||||||||||||||||
Free cash flow(2) | $ | 2,255 | $ | 32,898 | (93.1) | % | $ | 121,992 | $ | (44,970) | n/m | ||||||||||||||||||||||||
Active customers | 20,407 | 17,788 | 14.7 | % | 20,407 | $ | 17,788 | 14.7 | % | ||||||||||||||||||||||||||
Net sales per active customer | $ | 419 | $ | 363 | 15.4 | % | $ | 419 | $ | 363 | 15.4 | % | |||||||||||||||||||||||
Autoship customer sales | $ | 1,561,638 | $ | 1,232,743 | 26.7 | % | $ | 4,555,822 | $ | 3,495,535 | 30.3 | % | |||||||||||||||||||||||
Autoship customer sales as a percentage of net sales | 70.6 | % | 69.2 | % | 70.1 | % | 68.5 | % | |||||||||||||||||||||||||||
n/m - not meaningful | |||||||||||||||||||||||||||||||||||
(1) Includes share-based compensation expense, including related taxes, of $19.1 million and $69.5 million for the thirteen and thirty-nine weeks ended October 31, 2021, respectively, compared to $25.1 million and $105.2 million for the thirteen and thirty-nine weeks ended November 1, 2020, respectively. | |||||||||||||||||||||||||||||||||||
(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 income (loss) excluding depreciation and amortization; share-based compensation expense and related taxes; income tax provision; interest income (expense), net; management fee expense; transaction related costs; and litigation matters and other items that we do not consider representative of our underlying operations. We have provided a reconciliation below of adjusted EBITDA to net income (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; transaction related costs; and litigation matters and other items which 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:
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•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;
•adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy;
•adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;
•adjusted EBITDA does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including various cash flow metrics, net 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 Ended | 39 Weeks Ended | |||||||||||||||||||||
Reconciliation of Net Loss to Adjusted EBITDA | October 31, 2021 | November 1, 2020 | October 31, 2021 | November 1, 2020 | |||||||||||||||||||
Net loss | $ | (32,241) | $ | (32,847) | $ | (10,208) | $ | (113,534) | |||||||||||||||
Add: | |||||||||||||||||||||||
Depreciation and amortization | 14,024 | 9,262 | 38,141 | 24,598 | |||||||||||||||||||
Share-based compensation expense and related taxes | 19,116 | 25,090 | 69,477 | 105,228 | |||||||||||||||||||
Interest expense, net | 313 | 539 | 1,215 | 1,469 | |||||||||||||||||||
Management fee expense(1) | — | 325 | — | 975 | |||||||||||||||||||
Transaction related costs | 1,150 | — | 2,121 | — | |||||||||||||||||||
Other | 3,684 | 3,133 | 5,926 | 5,667 | |||||||||||||||||||
Adjusted EBITDA | $ | 6,046 | $ | 5,502 | $ | 106,672 | $ | 24,403 | |||||||||||||||
Net sales | $ | 2,212,161 | $ | 1,782,000 | $ | 6,502,375 | $ | 5,103,252 | |||||||||||||||
Net margin | (1.5) | % | (1.8) | % | (0.2) | % | (2.2) | % | |||||||||||||||
Adjusted EBITDA margin | 0.3 | % | 0.3 | % | 1.6 | % | 0.5 | % | |||||||||||||||
(1) Management fee expense allocated to us by PetSmart LLC (“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 during the thirteen and thirty-nine weeks ended November 1, 2020. |
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, 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.
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Free cash flow has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.
The following table presents a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated.
($ in thousands) | 13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | October 31, 2021 | November 1, 2020 | October 31, 2021 | November 1, 2020 | |||||||||||||||||||
Net cash provided by operating activities | $ | 74,255 | $ | 63,433 | $ | 257,706 | $ | 55,288 | |||||||||||||||
Deduct: | |||||||||||||||||||||||
Capital expenditures | (72,000) | (30,535) | (135,714) | (100,258) | |||||||||||||||||||
Free Cash Flow | $ | 2,255 | $ | 32,898 | $ | 121,992 | $ | (44,970) |
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 proprietary brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and proprietary 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 proprietary 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.
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% of net sales | % of net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
($ in thousands) | October 31, 2021 | November 1, 2020 | % Change | October 31, 2021 | November 1, 2020 | October 31, 2021 | November 1, 2020 | % Change | October 31, 2021 | November 1, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Statements of Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 2,212,161 | $ | 1,782,000 | 24.1 | % | 100.0 | % | 100.0 | % | $ | 6,502,375 | $ | 5,103,252 | 27.4 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||
Cost of goods sold | 1,627,320 | 1,327,442 | 22.6 | % | 73.6 | % | 74.5 | % | 4,734,304 | 3,836,629 | 23.4 | % | 72.8 | % | 75.2 | % | |||||||||||||||||||||||||||||||||||||||||||
Gross profit | 584,841 | 454,558 | 28.7 | % | 26.4 | % | 25.5 | % | 1,768,071 | 1,266,623 | 39.6 | % | 27.2 | % | 24.8 | % | |||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 466,434 | 352,250 | 32.4 | % | 21.1 | % | 19.8 | % | 1,310,326 | 1,015,488 | 29.0 | % | 20.2 | % | 19.9 | % | |||||||||||||||||||||||||||||||||||||||||||
Advertising and marketing | 150,335 | 134,616 | 11.7 | % | 6.8 | % | 7.6 | % | 466,738 | 363,200 | 28.5 | % | 7.2 | % | 7.1 | % | |||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 616,769 | 486,866 | 26.7 | % | 27.9 | % | 27.3 | % | 1,777,064 | 1,378,688 | 28.9 | % | 27.3 | % | 27.0 | % | |||||||||||||||||||||||||||||||||||||||||||
Loss from operations | (31,928) | (32,308) | 1.2 | % | (1.4) | % | (1.8) | % | (8,993) | (112,065) | 92.0 | % | (0.1) | % | (2.2) | % | |||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | (313) | (539) | 41.9 | % | — | % | — | % | (1,215) | (1,469) | 17.3 | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||
Loss before income tax provision | (32,241) | (32,847) | 1.8 | % | (1.5) | % | (1.8) | % | (10,208) | (113,534) | 91.0 | % | (0.2) | % | (2.2) | % | |||||||||||||||||||||||||||||||||||||||||||
Income tax provision | — | — | — | % | — | % | — | % | — | — | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||||||
Net loss | $ | (32,241) | $ | (32,847) | 1.8 | % | (1.5) | % | (1.8) | % | $ | (10,208) | $ | (113,534) | 91.0 | % | (0.2) | % | (2.2) | % | |||||||||||||||||||||||||||||||||||||||
Thirteen and Thirty-Nine Weeks Ended October 31, 2021 Compared to Thirteen and Thirty-Nine Weeks Ended November 1, 2020
Net Sales
13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
($ in thousands) | October 31, 2021 | November 1, 2020 | $ Change | % Change | October 31, 2021 | November 1, 2020 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||
Consumables | $ | 1,531,366 | $ | 1,236,291 | $ | 295,075 | 23.9 | % | $ | 4,470,333 | $ | 3,568,934 | $ | 901,399 | 25.3 | % | |||||||||||||||||||||||||||||||
Hardgoods | 306,161 | 283,717 | 22,444 | 7.9 | % | 968,383 | 823,221 | 145,162 | 17.6 | % | |||||||||||||||||||||||||||||||||||||
Other | 374,634 | 261,992 | 112,642 | 43.0 | % | 1,063,659 | 711,097 | 352,562 | 49.6 | % | |||||||||||||||||||||||||||||||||||||
Net sales | $ | 2,212,161 | $ | 1,782,000 | $ | 430,161 | 24.1 | % | $ | 6,502,375 | $ | 5,103,252 | $ | 1,399,123 | 27.4 | % | |||||||||||||||||||||||||||||||
Net sales for the thirteen weeks ended October 31, 2021 increased by $430.2 million, or 24.1%, to $2.2 billion compared to $1.8 billion for the thirteen weeks ended November 1, 2020. This increase was primarily due to growth in our customer base, with the number of active customers increasing by 2.6 million, or 14.7% year-over-year. Spending among our active customers also increased with net sales per active customer increasing $56, or 15.4%, in the thirteen weeks ended October 31, 2021 compared to the thirteen weeks ended November 1, 2020, driven by ongoing catalog expansion and growth across all verticals, led by our consumables and healthcare businesses.
Net sales for the thirty-nine weeks ended October 31, 2021 increased by $1.4 billion, or 27.4%, to $6.5 billion compared to $5.1 billion for the thirty-nine weeks ended November 1, 2020. This increase was primarily due to growth in our customer base, with the number of active customers increasing by 2.6 million, or 14.7% year-over-year. Spending among our active customers also increased with net sales per active customer increasing $56, or 15.4%, in the thirty-nine weeks ended October 31, 2021 compared to the thirty-nine weeks ended November 1, 2020, driven by ongoing catalog expansion and growth across all verticals, led by our consumables and healthcare businesses.
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Cost of Goods Sold and Gross Profit
Cost of goods sold for the thirteen weeks ended October 31, 2021 increased by $299.9 million, or 22.6%, to $1.6 billion compared to $1.3 billion in the thirteen weeks ended November 1, 2020. This increase was primarily due to a 20.9% increase in orders shipped and associated product, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in net sales on a percentage basis, primarily as a result of a change in mix of sales as healthcare businesses continue to grow faster than the overall business.
Cost of goods sold for the thirty-nine weeks ended October 31, 2021 increased by $897.7 million, or 23.4%, to $4.7 billion compared to $3.8 billion in the thirty-nine weeks ended November 1, 2020. This increase was primarily due to a 24.0% increase in orders shipped and associated product, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in net sales on a percentage basis, primarily as a result of a change in mix of sales as healthcare and proprietary brands businesses continue to grow faster than the overall business.
Gross profit for the thirteen weeks ended October 31, 2021 increased by $130.3 million, or 28.7%, to $584.8 million compared to $454.6 million in the thirteen weeks ended November 1, 2020. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirteen weeks ended October 31, 2021 increased by 90 basis points compared to the thirteen weeks ended November 1, 2020, primarily due to margin expansion across our consumables, hardgoods and healthcare businesses.
Gross profit for the thirty-nine weeks ended October 31, 2021 increased by $501.4 million, or 39.6%, to $1.8 billion compared to $1.3 billion in the thirty-nine weeks ended November 1, 2020. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirty-nine weeks ended October 31, 2021 increased by 240 basis points compared to the thirty-nine weeks ended November 1, 2020, primarily due to margin expansion across our consumables, hardgoods and healthcare businesses.
Selling, General and Administrative
Selling, general and administrative expenses for the thirteen weeks ended October 31, 2021 increased by $114.1 million, or 32.4%, to $466.4 million compared to $352.3 million in the thirteen weeks ended November 1, 2020. This increase was primarily due to an increase of $70.3 million in fulfillment costs largely attributable to increased investments to support the overall growth of our business, including the costs associated with opening and operating new fulfillment centers in Archbald, Pennsylvania, Lewisberry, Pennsylvania, and Belton, Missouri, a customer service center in Dallas, Texas, growth in fulfillment and customer service headcount, as well as expanded investments in wages and benefits and higher recruiting costs for fulfillment and customer service team members. Facilities expenses and other general and administrative expenses increased by $49.8 million, primarily due to the opening of new corporate offices in Seattle, Washington, increased headcount as a result of business growth, and expenses related to ongoing IT initiatives to support our customers and team members including the migration to cloud-based IT systems. These increases were partially offset by a $6.0 million reduction in non-cash share-based compensation expense.
Selling, general and administrative expenses for the thirty-nine weeks ended October 31, 2021 increased by $294.8 million, or 29.0%, to $1.3 billion compared to $1.0 billion in the thirty-nine weeks ended November 1, 2020. This increase was primarily due to an increase of $209.0 million in fulfillment costs largely attributable to increased investments to support the overall growth of our business, including the costs associated with opening and operating new fulfillment centers in Archbald, Pennsylvania, Salisbury, North Carolina, Lewisberry, Pennsylvania, and Belton, Missouri, a customer service center in Dallas, Texas, growth in fulfillment and customer service headcount, as well as expanded investments in wages and benefits and higher recruiting costs for fulfillment and customer service team members. Facilities expenses and other general and administrative expenses increased by $122.3 million, primarily due to the opening of new corporate offices in Seattle, Washington, increased headcount as a result of business growth, and expenses related to ongoing IT initiatives to support our employees including the migration to cloud-based IT systems. These increases were partially offset by a $36.5 million reduction in non-cash share-based compensation expense.
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Advertising and Marketing
Advertising and marketing expenses for the thirteen weeks ended October 31, 2021 increased by $15.7 million, or 11.7%, to $150.3 million compared to $134.6 million in the thirteen weeks ended November 1, 2020. The increase was primarily due to higher advertising and marketing spend in existing and new channels. Our marketing efforts and investments led to the addition of 2.6 million active customers since November 1, 2020.
Advertising and marketing expenses for the thirty-nine weeks ended October 31, 2021 increased by $103.5 million, or 28.5%, to $466.7 million compared to $363.2 million in the thirty-nine weeks ended November 1, 2020. The increase was primarily due to higher advertising and marketing spend in existing and new channels, as well as an increase in advertising input costs since the pandemic-lows seen in the first half of 2020. Our marketing efforts and investments led to the addition of 2.6 million active customers since November 1, 2020.
Liquidity and Capital Resources
We finance our operations and capital expenditures primarily through cash flows generated by operations and equity offerings. Our principal sources of liquidity are expected to be our cash and cash equivalents and our revolving credit facility. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds, U.S. Treasury securities, certificates of deposit, and commercial paper. Cash and cash equivalents totaled $726.9 million as of October 31, 2021, an increase of $163.6 million from January 31, 2021.
We believe that our cash and cash equivalents and availability under our revolving credit facility will be sufficient to fund our working capital, capital expenditure requirements, and contractual obligations for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in Item 1A of our 10-K Report. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.
2020 Equity Offering
On September 21, 2020, we issued and sold 5,865,000 shares of Class A common stock at a public offering price of $54.40 per share, raising $318.4 million in net proceeds after deducting offering costs of approximately $0.6 million. For additional information, see Note 7 in the “Notes to Condensed Consolidated Financial Statements” of this 10-Q Report.
Cash Flows
39 Weeks Ended | |||||||||||
($ in thousands) | October 31, 2021 | November 1, 2020 | |||||||||
Net cash provided by operating activities | $ | 257,706 | $ | 55,288 | |||||||
Net cash used in investing activities | $ | (135,714) | $ | (104,025) | |||||||
Net cash provided by financing activities | $ | 41,582 | $ | 342,477 |
Operating Activities
Net cash provided by operating activities was $257.7 million for the thirty-nine weeks ended October 31, 2021, which primarily consisted of $10.2 million of net loss, non-cash adjustments such as depreciation and amortization expense of $38.1 million and share-based compensation expense of $63.7 million, and a cash increase of $161.6 million from the management of working capital. Cash increases from working capital were primarily driven by an increase in payables and other current liabilities, partially offset by an increase in inventories, other current assets, and receivables.
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Net cash provided by operating activities was $55.3 million for the thirty-nine weeks ended November 1, 2020, which primarily consisted of $113.5 million of net loss, non-cash adjustments such as depreciation and amortization expense of $24.6 million and share-based compensation expense of $100.2 million, and a cash increase of $15.7 million from the management of working capital. Cash increases from working capital were primarily driven by an increase in other current liabilities and payables, partially offset by an increase in inventories, receivables, and other current assets.
Investing Activities
Net cash used in investing activities was $135.7 million for the thirty-nine weeks ended October 31, 2021, primarily consisting of capital expenditures related to the launch of new fulfillment centers as well as capitalization of labor and license costs associated with software development for internal use.
Net cash used in investing activities was $104.0 million for the thirty-nine weeks ended November 1, 2020, primarily consisting of $100.3 million of capital expenditures related to the launch of new fulfillment centers and a customer service center, as well as capitalization of labor and license costs associated with software development for internal use.
Financing Activities
Net cash provided by financing activities was $41.6 million for the thirty-nine weeks ended October 31, 2021 and consisted of $43.7 million received pursuant to the tax sharing agreement with related parties, partially offset by principal repayments of finance lease obligations.
Net cash provided by financing activities was $342.5 million for the thirty-nine weeks ended November 1, 2020, and consisted of $318.8 million in proceeds from our equity offering in September 2020, net of offering costs, $23.2 million received pursuant to the tax sharing agreement with related parties, as well as a management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions provided by its sponsors, partially offset by principal payments of finance lease obligations.
Other Liquidity Measures
ABL Credit Facility
We have a senior secured asset backed credit facility (the “ABL Credit Facility”) which was scheduled to mature in June 2024 and provided 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 provided 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. We were required to pay a commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which was generally based on average daily usage of the facility.
On August 27, 2021, we amended the ABL Credit Facility to increase the aggregate principal amount to $500 million and increase the amount available for incremental asset-based revolving loan facilities to $300 million. In addition, the amendments resulted in the commitment fee being modified from a range of 0.25% to 0.375% to a fixed 0.25% fee with respect to the undrawn portion of the commitments. The ABL Credit Facility now matures in August 2026.
Based on our borrowing base as of October 31, 2021, which is reduced by standby letters of credit, we had $463.3 million of borrowing capacity under the ABL Credit Facility. As of October 31, 2021, we had no outstanding borrowings under the ABL Credit Facility.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 in the “Notes to Condensed Consolidated Financial Statements” of this 10-Q Report.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risk disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this 10-Q Report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of October 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the thirteen weeks ended October 31, 2021. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of remote working on our internal controls.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning legal proceedings is provided in Item 1 of Part I, “Financial Statements (Unaudited)–Note 4– Commitments and Contingencies–Legal Matters” and is incorporated by reference herein.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
Item 6. Exhibits
Incorporation by Reference | ||||||||||||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith | ||||||||||||||
10.1 | 8-K | 001-38936 | 10.1 | September 1, 2021 | ||||||||||||||||
31.1 | X | |||||||||||||||||||
31.2 | X | |||||||||||||||||||
32.1 | X | |||||||||||||||||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
CHEWY, INC. | |||||||||||
Date: | December 9, 2021 | By: | /s/ Mario Marte | ||||||||
Mario Marte | |||||||||||
Chief Financial Officer | |||||||||||
(Principal Financial Officer) |
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