Chewy, Inc. - Quarter Report: 2023 April (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 April 30, 2023
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
![Chewy_Logo.jpg](https://www.sec.gov/Archives/edgar/data/0001766502/000176650223000026/chwy-20230430_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.) | |||||||
7700 West Sunrise Boulevard, Plantation, Florida | 33322 | |||||||
(Address of principal executive offices) | (Zip Code) |
(786) 320-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Class A Common Stock, par value $0.01 per share | CHWY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
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 May 24, 2023 | |||||||
Class A Common Stock, $0.01 par value per share | 116,239,180 | |||||||
Class B Common Stock, $0.01 par value per share | 311,188,356 |
CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended April 30, 2023
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,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning our ability to:
•sustain our recent growth rates and successfully manage challenges to our future growth, including introducing new products or services, improving existing products and services, and expanding into new offerings;
•successfully manage risks related to the macroeconomic environment, including any adverse impacts on our business operations, financial performance, supply chain, workforce, facilities, customer services and operations;
•acquire and retain new customers in a cost-effective manner and increase our net sales, improve margins and maintain profitability;
•manage our growth effectively;
•maintain positive perceptions of our company and preserve, grow and leverage the value of our reputation and our brand;
•limit operating losses as we continue to expand our business;
•forecast net sales and appropriately plan our expenses in the future;
•estimate the size of our addressable market;
•strengthen our current supplier relationships, retain key suppliers and source additional suppliers;
•negotiate acceptable pricing and other terms with third-party service providers, suppliers and outsourcing partners and maintain our relationships with such parties;
•mitigate changes in, or disruptions to, our shipping arrangements and operations;
•optimize, operate and manage the expansion of the capacity of our fulfillment centers;
•provide our customers with a cost-effective platform that is able to respond and adapt to rapid changes in technology;
•limit our losses related to online payment methods;
•maintain and scale our technology, including the reliability of our website, mobile applications, and network infrastructure;
•maintain adequate cybersecurity with respect to our systems and ensure that our third-party service providers do the same with respect to their systems;
•maintain consumer confidence in the safety, quality and health of our products;
•limit risks associated with our suppliers and our outsourcing partners;
•comply with existing or future laws and regulations in a cost-efficient manner;
•compete with other retailers and service providers;
•utilize tax attributes, net operating loss and tax credit carryforwards, and limit fluctuations in our tax obligations and effective tax rate;
•adequately protect our intellectual property rights;
•successfully defend ourselves against any allegations or claims that we may be subject to;
•attract, develop, motivate and retain highly-qualified and skilled employees;
•predict and respond to economic conditions, industry trends, and market conditions, and their impact on the pet products market;
•reduce merchandise returns or refunds;
•respond to severe weather and limit disruption to normal business operations;
•manage new acquisitions, investments or alliances, and integrate them into our existing business;
•successfully compete in the pet insurance market;
•manage challenges presented by international markets;
•successfully compete in the pet products and services health and retail industry, especially in the e-commerce sector;
•raise capital as needed; and
•maintain effective internal control over financial reporting and disclosure controls and procedures.
1
You should not rely on forward-looking statements as predictions of future events, and you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of factors. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current assumptions, expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023, our subsequent quarterly reports, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that 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 these channels could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
2
Item 1. Financial Statements (Unaudited)
CHEWY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
As of | |||||||||||
April 30, 2023 | January 29, 2023 | ||||||||||
Assets | (Unaudited) | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 408,685 | $ | 330,441 | |||||||
Marketable securities | 394,487 | 346,944 | |||||||||
Accounts receivable | 151,719 | 126,349 | |||||||||
Inventories | 731,376 | 675,520 | |||||||||
Prepaid expenses and other current assets | 47,345 | 41,067 | |||||||||
Total current assets | 1,733,612 | 1,520,321 | |||||||||
Property and equipment, net | 474,764 | 478,738 | |||||||||
Operating lease right-of-use assets | 447,581 | 423,423 | |||||||||
Goodwill | 39,442 | 39,442 | |||||||||
Other non-current assets | 42,945 | 53,152 | |||||||||
Total assets | $ | 2,738,344 | $ | 2,515,076 | |||||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities: | |||||||||||
Trade accounts payable | $ | 1,113,849 | $ | 1,030,882 | |||||||
Accrued expenses and other current liabilities | 779,625 | 738,467 | |||||||||
Total current liabilities | 1,893,474 | 1,769,349 | |||||||||
Operating lease liabilities | 500,578 | 471,765 | |||||||||
Other long-term liabilities | 61,927 | 60,005 | |||||||||
Total liabilities | 2,455,979 | 2,301,119 | |||||||||
Commitments and contingencies (Note 6) | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of April 30, 2023 and January 29, 2023 | — | — | |||||||||
Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 115,919,876 and 114,160,531 shares issued and outstanding as of April 30, 2023 and January 29, 2023, respectively | 1,159 | 1,141 | |||||||||
Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 311,188,356 shares issued and outstanding as of April 30, 2023 and January 29, 2023 | 3,112 | 3,112 | |||||||||
Additional paid-in capital | 2,217,456 | 2,171,247 | |||||||||
Accumulated deficit | (1,939,362) | (1,961,543) | |||||||||
Total stockholders’ equity | 282,365 | 213,957 | |||||||||
Total liabilities and stockholders’ equity | $ | 2,738,344 | $ | 2,515,076 |
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 | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Net sales | $ | 2,784,675 | $ | 2,428,327 | |||||||
Cost of goods sold | 1,993,220 | 1,760,507 | |||||||||
Gross profit | 791,455 | 667,820 | |||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 583,666 | 504,283 | |||||||||
Advertising and marketing | 183,733 | 144,721 | |||||||||
Total operating expenses | 767,399 | 649,004 | |||||||||
Income from operations | 24,056 | 18,816 | |||||||||
Interest income (expense), net | 8,016 | (344) | |||||||||
Other expense, net | (8,888) | — | |||||||||
Income before income tax provision | 23,184 | 18,472 | |||||||||
Income tax provision | 1,003 | — | |||||||||
Net income | $ | 22,181 | $ | 18,472 | |||||||
Earnings per share attributable to common Class A and Class B stockholders: | |||||||||||
Basic | $ | 0.05 | $ | 0.04 | |||||||
Diluted | $ | 0.05 | $ | 0.04 | |||||||
Weighted-average common shares used in computing earnings per share: | |||||||||||
Basic | 426,852 | 420,406 | |||||||||
Diluted | 430,471 | 426,710 |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
13 Weeks Ended April 30, 2023 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of January 29, 2023 | 425,349 | $ | 4,253 | $ | 2,171,247 | $ | (1,961,543) | $ | 213,957 | ||||||||||||||||||||
Share-based compensation expense | — | — | 48,553 | — | 48,553 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 1,759 | 18 | (18) | — | — | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | (2,326) | — | (2,326) | ||||||||||||||||||||||||
Net income | — | — | — | 22,181 | 22,181 | ||||||||||||||||||||||||
Balance as of April 30, 2023 | 427,108 | $ | 4,271 | $ | 2,217,456 | $ | (1,939,362) | $ | 282,365 | ||||||||||||||||||||
13 Weeks Ended May 1, 2022 | |||||||||||||||||||||||||||||
Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance as of January 30, 2022 | 420,106 | $ | 4,201 | $ | 2,021,310 | $ | (2,010,775) | $ | 14,736 | ||||||||||||||||||||
Share-based compensation expense | — | — | 25,794 | — | 25,794 | ||||||||||||||||||||||||
Vesting of share-based compensation awards | 553 | 6 | (6) | — | — | ||||||||||||||||||||||||
Tax withholdings for share-based compensation awards | (53) | (1) | (2,467) | — | (2,468) | ||||||||||||||||||||||||
Tax sharing agreement with related parties | — | — | 2,076 | — | 2,076 | ||||||||||||||||||||||||
Net income | — | — | — | 18,472 | 18,472 | ||||||||||||||||||||||||
Balance as of May 1, 2022 | 420,606 | $ | 4,206 | $ | 2,046,707 | $ | (1,992,303) | $ | 58,610 |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Cash flows from operating activities | |||||||||||
Net income | $ | 22,181 | $ | 18,472 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 28,877 | 17,340 | |||||||||
Share-based compensation expense | 48,553 | 25,794 | |||||||||
Non-cash lease expense | 11,924 | 9,109 | |||||||||
Change in fair value of equity warrants and investments | 8,948 | — | |||||||||
Other | 489 | 234 | |||||||||
Net change in operating assets and liabilities: | |||||||||||
Accounts receivable | (25,370) | (9,723) | |||||||||
Inventories | (55,856) | (37,770) | |||||||||
Prepaid expenses and other current assets | (10,721) | (14,248) | |||||||||
Other non-current assets | 298 | (1,469) | |||||||||
Trade accounts payable | 82,967 | 73,678 | |||||||||
Accrued expenses and other current liabilities | 39,399 | 2,881 | |||||||||
Operating lease liabilities | (5,219) | (5,338) | |||||||||
Other long-term liabilities | 1,922 | 3,473 | |||||||||
Net cash provided by operating activities | 148,392 | 82,433 | |||||||||
Cash flows from investing activities | |||||||||||
Capital expenditures | (21,573) | (76,021) | |||||||||
Cash paid for acquisition of business, net of cash acquired | (367) | — | |||||||||
Purchases of marketable securities | (394,098) | — | |||||||||
Proceeds from maturities of marketable securities | 350,000 | — | |||||||||
Other | — | (1,400) | |||||||||
Net cash used in investing activities | (66,038) | (77,421) | |||||||||
Cash flows from financing activities | |||||||||||
Payments for tax sharing agreement with related parties | (3,761) | (675) | |||||||||
Payment of debt modification costs | (175) | — | |||||||||
Principal repayments of finance lease obligations | (174) | (187) | |||||||||
Payments for tax withholdings related to vesting of share-based compensation awards | — | (2,468) | |||||||||
Net cash used in financing activities | (4,110) | (3,330) | |||||||||
Net increase in cash and cash equivalents | 78,244 | 1,682 | |||||||||
Cash and cash equivalents, as of beginning of period | 330,441 | 603,079 | |||||||||
Cash and cash equivalents, as of end of period | $ | 408,685 | $ | 604,761 |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Description of Business
Chewy, Inc. and its wholly-owned subsidiaries (collectively “Chewy” or the “Company”) is a pure play e-commerce business geared toward pet products and services for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy serves its customers through its retail website, www.chewy.com, and its mobile applications and focuses on delivering exceptional customer service, competitive prices, outstanding convenience (including Chewy’s Autoship subscription program, fast shipping, and hassle-free returns), and a large selection of high-quality pet food, treats and supplies, and pet healthcare products.
The Company is controlled by a consortium including private investment funds advised by BC Partners and its affiliates, 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”). The Company was controlled by PetSmart LLC (“PetSmart”), a wholly-owned subsidiary of the Sponsors through February 11, 2021.
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 (“ASC”). In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the quarterly period ended April 30, 2023 are not necessarily indicative of the results for the entire fiscal year. The unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2023 (“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 29, 2023 (“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 2023 fiscal year ends on January 28, 2024 and is a 52-week year. The Company’s 2022 fiscal year ended January 29, 2023 and was a 52-week year.
Significant Accounting Policies
Other than policies noted herein, there have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the 10-K Report.
Use of Estimates
GAAP requires management to make certain estimates, judgments, and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments. Actual results could differ from those estimates.
6
Key estimates relate primarily to determining the net realizable value and demand for inventory, useful lives associated with property and equipment and intangible assets, valuation allowances with respect to deferred tax assets, contingencies, self-insurance accruals, evaluation of sales tax positions, and the valuation and assumptions underlying share-based compensation and equity warrants. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Accrued Expenses and Other Current Liabilities
The following table presents the components of accrued expenses and other current liabilities (in thousands):
As of | |||||||||||
April 30, 2023 | January 29, 2023 | ||||||||||
Outbound fulfillment | $ | 425,944 | $ | 369,661 | |||||||
Advertising and marketing | 104,522 | 99,593 | |||||||||
Payroll liabilities | 47,231 | 66,799 | |||||||||
Accrued expenses and other | 201,928 | 202,414 | |||||||||
Total accrued expenses and other current liabilities | $ | 779,625 | $ | 738,467 |
Stockholders’ Equity
Conversion of Class B Common Stock
On May 8, 2020, Buddy Chester Sub LLC, a wholly-owned subsidiary of the Sponsors, converted 17,584,098 shares of the Company’s Class B common stock into Class A common stock. On May 11, 2020, Buddy Chester Sub LLC entered into a variable forward purchase agreement (“the Contract”) to deliver up to 17,584,098 shares of the Company’s Class A common stock at the exchange date, with the number of shares to be issued based on the trading price of the Company’s common stock during a 20-day observation period. On each of May 15, 2023 and May 16, 2023, Buddy Chester Sub LLC settled its obligations under the Contract and delivered a total of 17,584,098 shares.
Interest Income (Expense), net
The Company generates interest income from its cash and cash equivalents and marketable securities and incurs interest expense from its borrowing facilities and finance leases. The following table provides additional information about the Company’s interest income (expense), net (in thousands):
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Interest income | $ | 8,878 | $ | 256 | |||||||
Interest expense | (862) | (600) | |||||||||
Interest income (expense), net | $ | 8,016 | $ | (344) |
Other Income (Expense), net
The Company’s other income (expense), net consists of changes in the fair value of equity warrants and investments, foreign currency transaction gains and losses, and allowances for credit losses. The following table provides additional information about the Company’s other income (expense), net (in thousands):
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Change in fair value of equity warrants | $ | (8,934) | $ | — | |||||||
Change in fair value of equity investments | (14) | — | |||||||||
Foreign currency transaction gains | 60 | — | |||||||||
Other expense, net | $ | (8,888) | $ | — |
7
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU 2022-04—Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued this Accounting Standards Update (“ASU”) which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period. This update became effective at the beginning of the Company’s 2023 fiscal year. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. In June 2022, the FASB issued this ASU to clarify the guidance when measuring the fair value of an equity security subject to contractual sale restrictions that prohibit the sale of an equity security. This update is effective at the beginning of the Company’s 2024 fiscal year, with early adoption permitted. The Company does not believe the adoption of this standard will have a material impact on the Company’s condensed consolidated financial statements.
3. Acquisitions
Petabyte Acquisition
On October 23, 2022, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Petabyte Technology Inc. (“Petabyte”), a Delaware corporation. Under the terms of the Merger Agreement, the Company and Petabyte effected a merger on November 7, 2022, and Petabyte became a wholly-owned subsidiary of the Company. Headquartered in Bellevue, Washington, Petabyte is a provider of cloud-based technology solutions to the veterinary sector and the acquisition is expected to further strengthen the Company’s pet healthcare product and service offering.
The following table reconciles the estimated purchase price to the cash paid for the acquisition, net of cash acquired (in thousands):
Estimated purchase price | $ | 43,281 | |||
Less: cash acquired | 2,881 | ||||
Cash paid for acquisition of business, net of cash acquired | $ | 40,400 |
The Petabyte transaction was accounted for as a business combination in accordance with ASC 805 “Business Combinations.” Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values, with the remaining unallocated purchase price recorded as goodwill. Goodwill represents the expected synergies and cost rationalization from the merger of operations as well as intangible assets that do not qualify for separate recognition such as an assembled workforce.
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Assets acquired: | |||||
Cash and cash equivalents | $ | 2,881 | |||
Accounts receivable | 104 | ||||
Goodwill | 39,442 | ||||
Identified intangible assets | 1,510 | ||||
Other current and non-current assets | 318 | ||||
Liabilities assumed: | |||||
Other current and long-term liabilities | (974) | ||||
Estimated purchase price | $ | 43,281 |
8
As of April 30, 2023, the purchase price allocation is considered preliminary and is subject to change based on the final value of the net assets acquired. Pro forma information for the Petabyte acquisition has not been provided as the impact was not material to the Company’s consolidated results of operations.
Based on a preliminary allocation, in connection with this acquisition, the Company recorded goodwill of $39.4 million, none of which is anticipated to be deductible for tax purposes. The identified intangible assets consisted of $1.5 million of developed technology with an amortization period of 3.0 years.
4. Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1-Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2-Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3-Valuations based on unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Cash equivalents are carried at cost, which approximates fair value and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
Marketable securities are carried at fair value and are classified within Level 1 because they are valued using quoted market prices. Specific to marketable fixed income securities, the Company did not record any gross unrealized gains and losses as fair value approximates amortized cost. The Company did not record any credit losses during the thirteen weeks ended April 30, 2023. Further, as of April 30, 2023, the Company did not record an allowance for credit losses related to its fixed income securities.
Equity investments in public companies that have readily determinable fair values are carried at fair value and are classified within Level 1 because they are valued using quoted market prices.
Equity warrants are classified within Level 3 of the fair value hierarchy as they are valued based on observable and unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. The Company utilized certain valuation techniques such as the Black-Scholes option-pricing model and the Monte Carlo simulation model to determine the fair value of equity warrants. The application of these models requires the use of a number of complex assumptions based on unobservable inputs, including the expected term, expected equity volatility, discounts for lack of marketability, cash flow projections, and probability with respect to vesting requirements.
The following table includes a summary of financial instruments measured at fair value as of April 30, 2023 (in thousands):
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Cash | $ | 225,837 | $ | — | $ | — | ||||||||||||||
Money market funds | 163,040 | — | — | |||||||||||||||||
Commercial paper | 19,808 | — | — | |||||||||||||||||
Cash and cash equivalents | 408,685 | — | — | |||||||||||||||||
U.S. Treasury securities | 394,461 | — | — | |||||||||||||||||
Equity investments | 26 | — | — | |||||||||||||||||
Marketable securities | 394,487 | — | — | |||||||||||||||||
Equity warrants | — | — | 22,688 | |||||||||||||||||
Total financial instruments | $ | 803,172 | $ | — | $ | 22,688 |
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The following table includes a summary of financial instruments measured at fair value as of January 29, 2023 (in thousands):
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Cash | $ | 300,441 | $ | — | $ | — | ||||||||||||||
Money market funds | 30,000 | — | — | |||||||||||||||||
Cash and cash equivalents | 330,441 | — | — | |||||||||||||||||
U.S. Treasury securities | 346,926 | — | — | |||||||||||||||||
Equity investments | 18 | — | — | |||||||||||||||||
Marketable securities | 346,944 | — | — | |||||||||||||||||
Equity warrants | — | — | 31,622 | |||||||||||||||||
Total financial instruments | $ | 677,385 | $ | — | $ | 31,622 |
The following table summarizes the change in fair value for financial instruments using unobservable Level 3 inputs (in thousands):
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Beginning balance | $ | 31,622 | $ | — | |||||||
Change in fair value of equity warrants | (8,934) | — | |||||||||
Ending balance | $ | 22,688 | $ | — |
As of April 30, 2023 and January 29, 2023, the deferred credit subject to vesting requirements recognized within other long-term liabilities in exchange for the equity warrants was $45.0 million, respectively.
The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the equity warrants as of April 30, 2023 (in thousands):
Range | |||||||||||||||||||||||||||||||||||
Fair Value | Valuation Techniques | Unobservable Input | Min | Max | Weighted Average | ||||||||||||||||||||||||||||||
Equity warrants | $22,688 | Black-Scholes and Monte Carlo | Probability of vesting | 30% | 99% | 87% | |||||||||||||||||||||||||||||
Equity volatility | 35% | 80% | 76% |
5. Property and Equipment, net
The following is a summary of property and equipment, net (in thousands):
As of | |||||||||||
April 30, 2023 | January 29, 2023 | ||||||||||
Furniture, fixtures and equipment | $ | 164,351 | $ | 162,296 | |||||||
Computer equipment | 67,324 | 67,535 | |||||||||
Internal-use software | 147,230 | 138,123 | |||||||||
Leasehold improvements | 247,700 | 245,700 | |||||||||
Construction in progress | 102,210 | 93,534 | |||||||||
728,815 | 707,188 | ||||||||||
Less: accumulated depreciation and amortization | 254,051 | 228,450 | |||||||||
Property and equipment, net | $ | 474,764 | $ | 478,738 |
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Internal-use software includes labor and license costs associated with software development for internal use. As of April 30, 2023 and January 29, 2023, the Company had accumulated amortization related to internal-use software of $63.1 million and $56.5 million, respectively.
Construction in progress is stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
For the thirteen weeks ended April 30, 2023 and May 1, 2022, the Company recorded depreciation expense on property and equipment of $21.3 million and $12.1 million, respectively, and amortization expense related to internal-use software costs of $6.6 million and $4.4 million, respectively. The aforementioned depreciation and amortization expenses were included within selling, general and administrative expenses in the condensed consolidated statements of operations.
6. Commitments and Contingencies
Legal Matters
Various legal claims arise from time to time in the normal course of business. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
The Company believes that it has adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not believe that the ultimate resolution of any matters to which it is presently a party will have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
International Business Machines Corporation (“IBM”) previously alleged that the Company is infringing four of its patents. On February 15, 2021, the Company filed a declaratory judgment action in the United States District Court for the Southern District of New York (the “District Court”) against IBM seeking the District Court’s declaration that the Company is not infringing the four asserted IBM patents. On April 19, 2021, IBM filed an answer with counterclaims, 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 October 8, 2021, the parties had a claim construction hearing and on November 9, 2021, the claim construction rulings resulted in one of the five patents (the “‘414 patent”) being eliminated from the case.
The parties filed their motions for summary judgment which were fully briefed on February 24, 2022. After oral arguments on the motions for summary judgment, on April 11, 2022, the District Court granted the Company’s motions for summary judgment that the Company did not infringe three of the patents and that the fourth patent is invalid. On April 29, 2022, IBM filed a notice of appeal in the United States Court of Appeals for the Federal Circuit to appeal the District Court’s judgment. On August 18, 2022, IBM filed its opening appellate brief in the United States Court of Appeals for the Federal Circuit to appeal the District Court’s judgment granting the Company’s motions for summary judgment of non-infringement of certain of the patents. The appeal is fully briefed, and the parties are waiting for a hearing date. On May 3, 2023, IBM sent the Company a letter indicating that the ‘414 patent that was invalidated by the District Court was reexamined by the U.S. Patent & Trademark Office and a reexamination certificate was issued. As a result, IBM is asserting that the Company infringes the new claims of the ‘414 patent.The Company continues to deny this recent allegation related to the ‘414 patent and all other allegations of any infringement and intends to vigorously defend itself in this matter.
7. Debt
ABL Credit Facility
The Company has a senior secured asset-based credit facility (the “ABL Credit Facility”) which matures on August 27, 2026 and provides for non-amortizing revolving loans in an aggregate principal amount of up to $800 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $250 million, subject to customary conditions.
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The Company is required to pay a commitment fee of 0.25% per annum with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility. Based on the Company’s borrowing base as of April 30, 2023, which is reduced by standby letters of credit, the Company had $749.6 million of borrowing capacity under the ABL Credit Facility. As of April 30, 2023 and January 29, 2023, the Company had no outstanding borrowings under the ABL Credit Facility, respectively.
8. Leases
The Company leases all of its fulfillment and customer service centers and corporate offices under non-cancelable operating lease agreements. The terms of the Company’s real estate leases generally range from 5 to 15 years and typically allow for the leases to be renewed for up to three additional five-year terms. Fulfillment and customer service centers and corporate office leases 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 April 30, 2023 and January 29, 2023 were not material and were included in property and equipment, net, on the Company’s condensed consolidated balance sheets.
The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):
As of | ||||||||||||||||||||
Leases | Balance Sheet Classification | April 30, 2023 | January 29, 2023 | |||||||||||||||||
Assets | ||||||||||||||||||||
Operating | Operating lease right-of-use assets | $ | 447,581 | $ | 423,423 | |||||||||||||||
Total operating lease assets | $ | 447,581 | $ | 423,423 | ||||||||||||||||
Liabilities | ||||||||||||||||||||
Current | ||||||||||||||||||||
Operating | $ | 27,825 | $ | 27,611 | ||||||||||||||||
Non-current | ||||||||||||||||||||
Operating | Operating lease liabilities | 500,578 | 471,765 | |||||||||||||||||
Total operating lease liabilities | $ | 528,403 | $ | 499,376 |
For the thirteen weeks ended April 30, 2023 and May 1, 2022, assets acquired in exchange for new operating lease liabilities were $33.7 million and $8.9 million, respectively. Lease expense primarily relates to operating lease costs. Lease expense for the thirteen weeks ended April 30, 2023 and May 1, 2022 was $26.1 million and $21.3 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 $21.1 million and $18.6 million for the thirteen weeks ended April 30, 2023 and May 1, 2022, respectively.
9. Share-Based Compensation
2022 Omnibus Incentive Plan
In July 2022, the Company’s stockholders approved the Chewy, Inc. 2022 Omnibus Incentive Plan (the “2022 Plan”) replacing the Chewy, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2022 Plan became effective on July 14, 2022 and allows for the issuance of up to 40.0 million shares of Class A common stock and 1.0 million shares for new grants rolled over from the 2019 Plan. No awards may be granted under the 2022 Plan after July 2032. The 2022 Plan provides for the grants of: (i) options, including incentive stock options and non-qualified stock options, (ii) restricted stock units, (iii) other share-based awards, including share appreciation rights, phantom stock, restricted shares, performance shares, deferred share units, and share-denominated performance units, (iv) cash awards, (v) substitute awards, and (vi) dividend equivalents (collectively the “awards”). The awards may be granted to (i) the Company’s employees, consultants, and non-employee directors, (ii) employees of the Company’s affiliates and subsidiaries, and (iii) consultants of the Company’s subsidiaries.
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Service and Performance-Based Awards
The Company granted restricted stock units which vested upon satisfaction of both service-based vesting conditions and company performance-based vesting conditions (“PRSUs”), subject to the employee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for PRSUs over the requisite service period and accounted for forfeitures as they occur.
Service and Performance-Based Awards Activity
The following table summarizes the activity related to the Company’s PRSUs for the thirteen weeks ended April 30, 2023 (in thousands, except for weighted-average grant date fair value):
Number of PRSUs | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested and outstanding as of January 29, 2023 | 2,206 | $ | 36.22 | ||||||||
Granted | 190 | $ | 35.21 | ||||||||
Vested | (87) | $ | 29.31 | ||||||||
Forfeited | (159) | $ | 37.53 | ||||||||
Unvested and outstanding as of April 30, 2023 | 2,150 | $ | 36.31 |
The following table summarizes the weighted average grant-date fair value of PRSUs granted and total fair value of PRSUs vested for the periods presented:
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Weighted average grant-date fair value of PRSUs | $ | 35.21 | $ | 43.59 | |||||||
Total fair value of vested PRSUs (in millions) | $ | 3.5 | $ | 5.7 |
As of April 30, 2023, total unrecognized compensation expense related to unvested PRSUs was $9.3 million and is expected to be recognized over a weighted-average expected performance period of 2.3 years.
The fair value for PRSUs with a Company performance-based vesting condition is established based on the market price of the Company’s Class A common stock on the date of grant.
Service-Based Awards
The Company granted restricted stock units with service-based vesting conditions (“RSUs”) which vested subject to the employee’s continued employment with the Company through the applicable vesting date. The Company recorded share-based compensation expense for RSUs on a straight-line basis over the requisite service period and accounted for forfeitures as they occur.
Service-Based Awards Activity
The following table summarizes the activity related to the Company’s RSUs for the thirteen weeks ended April 30, 2023 (in thousands, except for weighted-average grant date fair value):
Number of RSUs | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested and outstanding as of January 29, 2023 | 10,813 | $ | 45.56 | ||||||||
Granted | 8,895 | $ | 35.21 | ||||||||
Vested | (1,672) | $ | 47.68 | ||||||||
Forfeited | (372) | $ | 44.98 | ||||||||
Unvested and outstanding as of April 30, 2023 | 17,664 | $ | 40.16 |
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The following table summarizes the weighted average grant-date fair value of RSUs granted and total fair value of RSUs vested for the periods presented:
13 Weeks Ended | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
Weighted average grant-date fair value of RSUs | $ | 35.21 | $ | 43.59 | |||||||
Total fair value of vested RSUs (in millions) | $ | 74.9 | $ | 18.8 |
As of April 30, 2023, total unrecognized compensation expense related to unvested RSUs was $626.0 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 April 30, 2023, there were 29.1 million additional shares of Class A common stock reserved for future issuance under the 2022 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 | |||||||||||
April 30, 2023 | May 1, 2022 | ||||||||||
PRSUs | $ | (1,400) | $ | 4,639 | |||||||
RSUs | 49,953 | 21,155 | |||||||||
Total share-based compensation expense | $ | 48,553 | $ | 25,794 |
10. Income Taxes
Chewy is subject to taxation in the U.S. and various state, local, and foreign jurisdictions. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared based on Chewy’s separate return method.
The Company had a current income tax provision during the thirteen weeks ended April 30, 2023 of $1.0 million. The Company did not have a current or deferred provision for income taxes for any taxing jurisdiction during the thirteen weeks ended May 1, 2022. Additionally, the Company maintained a full valuation allowance on its net deferred tax assets.
Concurrent with its initial public offering during the fiscal year ended February 2, 2020, the Company, PetSmart, and 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 thirteen weeks ended April 30, 2023, and May 1, 2022, the Company paid $3.8 million and $0.7 million, respectively, pursuant to the tax sharing agreement. The tax sharing agreement was effectively terminated for federal income taxes upon tax deconsolidation with PetSmart, however, there may be future settlements upon final adjustment to the consolidated federal tax returns. The tax sharing agreement remains in effect for certain states in which the Company continues to file with Argos Holdco. As of April 30, 2023 and January 29, 2023, the Company had a payable related to the tax sharing agreement of $3.8 million and $5.3 million, respectively.
On August 16, 2022, the U.S enacted the Inflation Reduction Act which introduced new tax provisions, including a 15% corporate alternative minimum tax, a 1% excise tax on corporate stock buybacks, and several tax incentives to promote clean energy. These tax provisions are effective for tax years beginning on or after December 31, 2022, and will not have a material impact on the Company’s condensed consolidated financial statements.
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11. Earnings per Share
Basic and diluted earnings per share attributable to common stockholders are presented using the two-class method required for participating securities. Under the two-class method, net income 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 income 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 earnings per share are calculated by dividing net income attributable to common stockholders by the weighted-average shares outstanding during the period.
The following table sets forth basic and diluted earnings per share attributable to common stockholders for the periods presented (in thousands, except per share data):
13 Weeks Ended | |||||||||||
Basic and diluted earnings per share | April 30, 2023 | May 1, 2022 | |||||||||
Numerator | |||||||||||
Earnings attributable to common Class A and Class B stockholders | $ | 22,181 | $ | 18,472 | |||||||
Denominator | |||||||||||
Weighted-average common shares used in computing earnings per share: | |||||||||||
Basic | 426,852 | 420,406 | |||||||||
Effect of dilutive stock-based awards | 3,619 | 6,304 | |||||||||
Diluted | 430,471 | 426,710 | |||||||||
Anti-dilutive stock-based awards excluded from diluted common shares | 5,176 | 3,110 | |||||||||
Earnings per share attributable to common Class A and Class B stockholders: | |||||||||||
Basic | $ | 0.05 | $ | 0.04 | |||||||
Diluted | $ | 0.05 | $ | 0.04 |
12. Certain Relationships and Related Party Transactions
Certain of the Company’s healthcare operations are conducted through a wholly-owned subsidiary of PetSmart for which the Company and PetSmart entered into a services agreement which provides for the payment of a management fee due from PetSmart. The Company recognized $2.0 million and $1.3 million within net sales in the condensed consolidated statements of operations for the services provided during the thirteen weeks ended April 30, 2023 and May 1, 2022, respectively.
As of April 30, 2023 and January 29, 2023, the Company had a net payable to PetSmart of $4.1 million and $4.9 million, respectively, which was included in accrued expenses and other current liabilities on the Company’s condensed consolidated balance sheets.
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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 April 30, 2023 (“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 29, 2023 (“10-K Report”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein and in our 10-K Report, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries.
Investors and others should note that we may announce material 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 these channels could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
Overview
We are the largest pure-play pet e-tailer in the United States, offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and services, as well as the around-the-clock convenience, that only e-commerce can offer. We believe that we are the preeminent destination for pet parents as a result of our broad selection of high-quality products and expanded menu of service offerings, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and partners and continually develop innovative ways for our customers to engage with us. We partner with more than 3,500 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 110,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
Macroeconomic Considerations
The evolving macroeconomic conditions, including rising inflation and interest rates, have affected, and continue to affect, our business and consumer shopping behavior. We continue to monitor conditions closely and adapt aspects of our logistics, transportation, supply chain, and purchasing processes accordingly to meet the needs of our growing community of pets, pet parents and partners. As our customers react to these economic conditions, we will adapt our business accordingly to meet their evolving needs.
We are unable to predict the duration and ultimate impact of the evolving macroeconomic conditions on the broader economy or our operations and liquidity. As such, macroeconomic risks and uncertainties remain. Please refer to the “Cautionary Note Regarding Forward-Looking Statements” in this 10-Q Report and in the section titled “Risk Factors” in Item 1A of Form 10-K for the fiscal year ended January 29, 2023.
Fiscal Year End
We have a 52- or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. Our 2023 fiscal year ends on January 28, 2024 and is a 52-week year. Our 2022 fiscal year ended January 29, 2023 and was a 52-week year.
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Key Financial and Operating Data
We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
13 Weeks Ended | |||||||||||||||||
(in thousands, except net sales per active customer, per share data, and percentages) | April 30, 2023 | May 1, 2022 | % Change | ||||||||||||||
Financial and Operating Data | |||||||||||||||||
Net sales | $ | 2,784,675 | $ | 2,428,327 | 14.7 | % | |||||||||||
Net income (1) | $ | 22,181 | $ | 18,472 | 20.1 | % | |||||||||||
Net margin | 0.8 | % | 0.8 | % | |||||||||||||
Adjusted EBITDA (2) | $ | 110,174 | $ | 60,516 | 82.1 | % | |||||||||||
Adjusted EBITDA margin (2) | 4.0 | % | 2.5 | % | |||||||||||||
Adjusted net income (2) | $ | 87,249 | $ | 45,666 | 91.1 | % | |||||||||||
Earnings per share, basic and diluted (1) | $ | 0.05 | $ | 0.04 | 25.0 | % | |||||||||||
Adjusted earnings per share, basic and diluted (2) | $ | 0.20 | $ | 0.11 | 81.8 | % | |||||||||||
Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | 80.0 | % | |||||||||||
Free cash flow (2) | $ | 126,819 | $ | 6,412 | n/m | ||||||||||||
Active customers | 20,419 | 20,601 | (0.9) | % | |||||||||||||
Net sales per active customer | $ | 512 | $ | 446 | 14.8 | % | |||||||||||
Autoship customer sales | $ | 2,080,510 | $ | 1,753,681 | 18.6 | % | |||||||||||
Autoship customer sales as a percentage of net sales | 74.7 | % | 72.2 | % | |||||||||||||
n/m - not meaningful | |||||||||||||||||
(1) Includes share-based compensation expense and related taxes of $53.8 million for the thirteen weeks ended April 30, 2023, compared to $27.2 million for the thirteen weeks ended May 1, 2022. | |||||||||||||||||
(2) Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP financial measures. |
We define net margin as net income (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; transaction related costs; changes in the fair value of equity warrants; exit 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 and adjusted EBITDA margin in this 10-Q Report because each is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA and adjusted EBITDA margin facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA and adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
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We believe it is useful to exclude non-cash charges, such as depreciation and amortization and share-based compensation expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; transaction related costs; changes in the fair value of equity warrants; exit costs; and 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:
•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 changes in the fair value of equity warrants, exit costs, litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including various cash flow metrics, net income (loss), net margin, and our other GAAP results.
The following table presents a reconciliation of net income to adjusted EBITDA, as well as the calculation of net margin and adjusted EBITDA margin, for each of the periods indicated.
(in thousands, except percentages) | 13 Weeks Ended | ||||||||||
Reconciliation of Net Income to Adjusted EBITDA | April 30, 2023 | May 1, 2022 | |||||||||
Net income | $ | 22,181 | $ | 18,472 | |||||||
Add: | |||||||||||
Depreciation and amortization | 28,877 | 17,340 | |||||||||
Share-based compensation expense and related taxes | 53,777 | 27,194 | |||||||||
Interest (income) expense, net | (8,016) | 344 | |||||||||
Change in fair value of equity warrants | 8,934 | — | |||||||||
Income tax provision | 1,003 | — | |||||||||
Exit costs | 2,357 | — | |||||||||
Transaction related costs | — | 1,158 | |||||||||
Other | 1,061 | (3,992) | |||||||||
Adjusted EBITDA | $ | 110,174 | $ | 60,516 | |||||||
Net sales | $ | 2,784,675 | $ | 2,428,327 | |||||||
Net margin | 0.8 | % | 0.8 | % | |||||||
Adjusted EBITDA margin | 4.0 | % | 2.5 | % |
Adjusted Net Income and Adjusted Basic and Diluted Earnings per Share
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this 10-Q Report adjusted net income and adjusted basic and diluted earnings per share, which represent non-GAAP financial measures. We calculate adjusted net income as net income excluding share-based compensation expense and related taxes, changes in the fair value of equity warrants, and exit costs. We calculate adjusted basic and diluted earnings per share by dividing adjusted net income attributable to common stockholders by the weighted-average shares outstanding during the period. We have provided a reconciliation below of adjusted net income to net income, the most directly comparable GAAP financial measure.
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We have included adjusted net income and adjusted basic and diluted earnings per share in this 10-Q Report because each is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted net income and adjusted basic and diluted earnings per share facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable gains and losses that do not represent a component of our core business operations. We believe it is useful to exclude non-cash share-based compensation expense because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude exit costs and the changes in the fair value of equity warrants, because exit costs and the variability of equity warrant gains and losses are not representative of our underlying operations. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted net income and adjusted basic and diluted earnings per share have limitations as financial measures and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Other companies may calculate adjusted net income and adjusted basic and diluted earnings per share differently, which reduces their usefulness as comparative measures. Because of these limitations, you should consider adjusted net income and adjusted basic and diluted earnings alongside other financial performance measures, including various cash flow metrics, net income, basic and diluted earnings per share, and our other GAAP results.
The following table presents a reconciliation of net income to adjusted net income, as well as the calculation of adjusted basic and diluted earnings per share, for each of the periods indicated.
(in thousands, except per share data) | 13 Weeks Ended | ||||||||||
Reconciliation of Net Income to Adjusted Net Income | April 30, 2023 | May 1, 2022 | |||||||||
Net income | $ | 22,181 | $ | 18,472 | |||||||
Add: | |||||||||||
Share-based compensation expense and related taxes | 53,777 | 27,194 | |||||||||
Change in fair value of equity warrants | 8,934 | — | |||||||||
Exit costs | 2,357 | — | |||||||||
Adjusted net income | $ | 87,249 | $ | 45,666 | |||||||
Weighted-average common shares used in computing adjusted earnings per share: | |||||||||||
Basic | 426,852 | 420,406 | |||||||||
Effect of dilutive share-based awards | 3,619 | 6,304 | |||||||||
Diluted | 430,471 | 426,710 | |||||||||
Earnings per share attributable to common Class A and Class B stockholders | |||||||||||
Basic | $ | 0.05 | $ | 0.04 | |||||||
Diluted | $ | 0.05 | $ | 0.04 | |||||||
Adjusted basic | $ | 0.20 | $ | 0.11 | |||||||
Adjusted diluted | $ | 0.20 | $ | 0.11 |
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 used by our management and board of directors as an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
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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 | ||||||||||
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | April 30, 2023 | May 1, 2022 | |||||||||
Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | |||||||
Deduct: | |||||||||||
Capital expenditures | (21,573) | (76,021) | |||||||||
Free Cash Flow | $ | 126,819 | $ | 6,412 |
Free cash flow may be affected in the near to medium term by the timing of capital investments (such as the launch of new fulfillment centers, customer service centers, and corporate offices and purchases of IT and other equipment), fluctuations in our growth and the effect of such fluctuations on working capital, and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.
Key Operating Metrics
Active Customers
As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered a product or service, and for whom a product has shipped or for whom a service has been provided, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well 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 that had an order shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers) for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.
Autoship Customer Sales as a Percentage of Net Sales
We define Autoship customer sales as a percentage of net sales as the Autoship customer sales in a given reporting period divided by the net sales from all orders in that period. We view Autoship customer sales as a percentage of net sales as a key indicator of our recurring sales and customer retention.
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Components of Results of Consolidated Operations
Net Sales
We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program.
We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.
Cost of Goods Sold
Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.
Selling, General and Administrative
Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs.
Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
Advertising and Marketing
Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.
Interest Income (Expense), net
We generate interest income from our cash and cash equivalents and marketable securities. We incur interest expense from our credit facilities and finance leases.
Other Income (Expense), net
Our other income (expense), net consists of changes in the fair value of equity warrants and investments, foreign currency transaction gains and losses, and allowances for credit losses.
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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 | |||||||||||||||||||||||||||||
% of net sales | |||||||||||||||||||||||||||||
(in thousands, except percentages) | April 30, 2023 | May 1, 2022 | % Change | April 30, 2023 | May 1, 2022 | ||||||||||||||||||||||||
Consolidated Statements of Operations | |||||||||||||||||||||||||||||
Net sales | $ | 2,784,675 | $ | 2,428,327 | 14.7 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
Cost of goods sold | 1,993,220 | 1,760,507 | 13.2 | % | 71.6 | % | 72.5 | % | |||||||||||||||||||||
Gross profit | 791,455 | 667,820 | 18.5 | % | 28.4 | % | 27.5 | % | |||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||
Selling, general and administrative | 583,666 | 504,283 | 15.7 | % | 21.0 | % | 20.8 | % | |||||||||||||||||||||
Advertising and marketing | 183,733 | 144,721 | 27.0 | % | 6.6 | % | 6.0 | % | |||||||||||||||||||||
Total operating expenses | 767,399 | 649,004 | 18.2 | % | 27.6 | % | 26.7 | % | |||||||||||||||||||||
Income from operations | 24,056 | 18,816 | 27.8 | % | 0.9 | % | 0.8 | % | |||||||||||||||||||||
Interest income (expense), net | 8,016 | (344) | n/m | 0.3 | % | — | % | ||||||||||||||||||||||
Other expense, net | (8,888) | — | n/m | (0.3) | % | — | % | ||||||||||||||||||||||
Income before income tax provision | 23,184 | 18,472 | 25.5 | % | 0.8 | % | 0.8 | % | |||||||||||||||||||||
Income tax provision | 1,003 | — | n/m | — | % | — | % | ||||||||||||||||||||||
Net income | $ | 22,181 | $ | 18,472 | 20.1 | % | 0.8 | % | 0.8 | % | |||||||||||||||||||
n/m - not meaningful |
Thirteen Weeks Ended April 30, 2023 Compared to Thirteen Weeks Ended May 1, 2022
Net Sales
13 Weeks Ended | |||||||||||||||||||||||
(in thousands, except percentages) | April 30, 2023 | May 1, 2022 | $ Change | % Change | |||||||||||||||||||
Consumables | $ | 2,004,384 | $ | 1,698,139 | $ | 306,245 | 18.0 | % | |||||||||||||||
Hardgoods | 311,115 | 316,024 | (4,909) | (1.6) | % | ||||||||||||||||||
Other | 469,176 | 414,164 | 55,012 | 13.3 | % | ||||||||||||||||||
Net sales | $ | 2,784,675 | $ | 2,428,327 | $ | 356,348 | 14.7 | % | |||||||||||||||
Net sales for the thirteen weeks ended April 30, 2023 increased by $356.3 million, or 14.7%, to $2.8 billion compared to $2.4 billion for the thirteen weeks ended May 1, 2022. This increase was primarily due to increases in spending per customer from our large and stable customer base. Net sales per active customer increased $66, or 14.8%, in the thirteen weeks ended April 30, 2023 compared to the thirteen weeks ended May 1, 2022, driven by growth across our consumables and healthcare businesses.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the thirteen weeks ended April 30, 2023 increased by $232.7 million, or 13.2%, to $2.0 billion compared to $1.8 billion in the thirteen weeks ended May 1, 2022. This increase was primarily due to an increase in associated product, outbound freight, and shipping supply costs, as well as an increase in orders shipped. The increase in cost of goods sold was lower than the increase in net sales on a percentage basis, reflecting pricing strength, favorable changes in our mix of sales, and supply chain efficiency gains across our fulfillment network.
Gross profit for the thirteen weeks ended April 30, 2023 increased by $123.6 million, or 18.5%, to $791.5 million compared to $667.8 million in the thirteen weeks ended May 1, 2022. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirteen weeks ended April 30, 2023 increased by 90 basis points compared to the thirteen weeks ended May 1, 2022, primarily due to margin expansion across our consumables, healthcare, and specialty businesses.
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Selling, General and Administrative
Selling, general and administrative expenses for the thirteen weeks ended April 30, 2023 increased by $79.4 million, or 15.7%, to $583.7 million compared to $504.3 million in the thirteen weeks ended May 1, 2022. This was primarily due to an increase of $45.5 million in facilities expenses and other general and administrative expenses, principally due to business growth and new initiatives as well as the opening and operating of corporate offices in Plantation, Florida, and Seattle, Washington. This also included an increase of $26.6 million in non-cash share-based compensation expense and related taxes as well as an increase of $7.3 million in fulfillment costs largely attributable to investments to support the overall growth of our business, including the costs associated with the opening and operating of fulfillment centers in Reno, Nevada and Nashville, Tennessee.
Advertising and Marketing
Advertising and marketing expenses for the thirteen weeks ended April 30, 2023 increased by $39.0 million, or 27.0%, to $183.7 million compared to $144.7 million in the thirteen weeks ended May 1, 2022. Our marketing expenses increased due to additional investment in our upper funnel marketing channels as well as expansion into new channels, contributing to new customer acquisition and an increase in wallet share from our large and stable customer base.
Interest Income (Expense), net
Interest income for the thirteen weeks ended April 30, 2023 increased by $8.3 million, to $8.0 million compared to interest expense of $0.3 million in the thirteen weeks ended May 1, 2022. This increase was due to interest income generated by cash and cash equivalents and marketable securities exceeding interest expenses incurred.
Other Income (Expense), net
Other expenses for the thirteen weeks ended April 30, 2023 were $8.9 million and consisted of changes in the fair value of equity warrants and investments, partially offset by foreign currency transaction gains.
Liquidity and Capital Resources
We finance our operations and capital expenditures primarily through cash flows generated by operations. Our principal sources of liquidity are expected to be our cash and cash equivalents, marketable securities, 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 $408.7 million as of April 30, 2023, an increase of $78.2 million from January 29, 2023. Marketable securities consist primarily of U.S. treasury securities, certificates of deposit, and commercial paper and totaled $394.5 million as of April 30, 2023, an increase of $47.5 million from January 29, 2023.
We believe that our cash and cash equivalents, marketable securities, and availability under our revolving credit facility will be sufficient to fund our working capital, capital expenditure requirements, and contractual obligations for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in Item 1A of our 10-K Report. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.
Cash Flows
13 Weeks Ended | |||||||||||
($ in thousands) | April 30, 2023 | May 1, 2022 | |||||||||
Net cash provided by operating activities | $ | 148,392 | $ | 82,433 | |||||||
Net cash used in investing activities | $ | (66,038) | $ | (77,421) | |||||||
Net cash used in financing activities | $ | (4,110) | $ | (3,330) |
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Operating Activities
Net cash provided by operating activities was $148.4 million for the thirteen weeks ended April 30, 2023, which primarily consisted of $22.2 million of net income, non-cash adjustments such as depreciation and amortization expense of $28.9 million and share-based compensation expense of $48.6 million, and a cash increase of $30.4 million from 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, receivables, and other current assets.
Net cash provided by operating activities was $82.4 million for the thirteen weeks ended May 1, 2022, which primarily consisted of $18.5 million of net income, non-cash adjustments such as depreciation and amortization expense of $17.3 million and share-based compensation expense of $25.8 million, and a cash increase of $14.8 million from working capital. Cash increases from working capital were primarily driven by an increase in payables, partially offset by an increase in inventories, other current assets, and receivables.
Investing Activities
Net cash used in investing activities was $66.0 million for the thirteen weeks ended April 30, 2023, primarily consisting of $44.1 million for the purchases of marketable securities, net of maturities and $21.6 million for capital expenditures. Capital expenditures were related to the launch of new and future fulfillment centers and additional investments in IT hardware and software.
Net cash used in investing activities was $77.4 million for the thirteen weeks ended May 1, 2022, primarily consisting of capital expenditures related to the launch of new and future fulfillment centers and additional investments in IT hardware and software.
Financing Activities
Net cash used in financing activities was $4.1 million for the thirteen weeks ended April 30, 2023 and consisted of payments made pursuant to the tax sharing agreement with related parties, payment of debt modification costs, and principal repayments of finance lease obligations.
Net cash used in financing activities was $3.3 million for the thirteen weeks ended May 1, 2022, and consisted of $2.5 million for payments of tax withholdings related to vesting of share-based compensation awards, payments pursuant to the tax sharing agreement with related parties, and principal repayments of finance lease obligations.
Other Liquidity Measures
ABL Credit Facility
We have a senior secured asset-based credit facility (the “ABL Credit Facility”) which matures on August 27, 2026 and provides for non-amortizing revolving loans in the aggregate principal amount of up to $800 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities up to $250 million, subject to customary conditions. We are required to pay a 0.25% per annum commitment fee with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility. Based on our borrowing base as of April 30, 2023, which is reduced by standby letters of credit, we had $749.6 million of borrowing capacity under the ABL Credit Facility. As of April 30, 2023 and January 29, 2023, we had no outstanding borrowings under the ABL Credit Facility, respectively.
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.
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 29, 2023.
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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 April 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the thirteen weeks ended April 30, 2023.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning legal proceedings is provided in Item 1 of Part I, “Financial Statements (Unaudited)–Note 6– 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 29, 2023.
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Item 6. Exhibits
Incorporation by Reference | ||||||||||||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | Filed Herewith | ||||||||||||||
3.2 | 8-K | 001-38936 | 3.2 | April 12, 2023 | ||||||||||||||||
10.1 | X | |||||||||||||||||||
10.2 | X | |||||||||||||||||||
31.1 | X | |||||||||||||||||||
31.2 | X | |||||||||||||||||||
32.1 | X | |||||||||||||||||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||
* Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto |
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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: | May 31, 2023 | By: | /s/ Mario Marte | ||||||||
Mario Marte | |||||||||||
Chief Financial Officer | |||||||||||
(Principal Financial Officer) |
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