Chewy's new vet clinics aim to reduce pet care costs: CEO

There's a pet company, Chewy, surging after reporting a boost in sales in its first quarter. Its auto ship customer sales were up over 6% as consumers looked to seek their best deals on some of their pet needs. You're looking at a jump of just about 26%, the biggest intraday jump that we've seen in the stock in well over a year. We want to bring in Sumit Singh, the CEO of Chewy and Yahoo Finance's executive editor, Brian Sazi, here joining us. Sumit, it's great to see you. Congratulations on a strong quarter. We're looking at shares here surging in early trading. So talk to us just about the trends that you're seeing within your business and whether or not some of the strength that you saw last quarter, whether or not that's carrying over into the current quarter right now. It's nice to see both of you. Thank you for having me. You know, a couple of things are really positive. One, you know, we're seeing green shoots in the industry. So we've called this the year of normalization and we believe that we've got a fairly good sense of demand and fairly good sense of how this normalization is occurring. You know, second, inflation was an important point carrying through last year and you're starting, you know, to see that sort of win off. You know, third, we saw healthy sort of balances between net adoption rates and relinquishments rates that came through from shelter and rescue community every month this year to date. So all of these are good inputs that essentially lend some encouraging signs towards the normalization of PET that we've been talking about. And you put, you know, our great service and this quasi-subscription model that we talk about, which is ownership, and it's just, you know, consumers were able to attract the right type of consumers and get them to really spend on a repeat basis. We pass on value and we drive a ton of convenience and the overall value proposition is resonating really loudly. Sumit, I did a casual search, your website, a couple of others, dry dog food. 40 pound bags of dry dog food. I was looking for blue buffalo, $65. And this stuff is pretty expensive. What is your outlook for inflation? Maybe you could speak to the consumer environment. Are prices for any of these products, for food, for pets, going to come down at any point this year? Yeah, so Brian, it's a great question. You know, what we've seen the last few years is an unprecedented amount of inflation that has passed through the system. Normally, when you look at PET over a 10, 15 year period, you know, it's natural to expect pricing to be somewhere between the two and 4% range on a comp basis. And yet the last three years has been in double digit percentages. You know, now I started this call by saying that we have started to see that come down into the low, low single digit starting this quarter. And, you know, most of pet food and consumables is map compliant, which is there is actually a floor underneath, you know, the pricing and brands do a good job maintaining that pricing structure. So not really expecting, you know, something structural to change in pricing moving forward. But what we could expect the latter half of this year is incremental discounting as both vendors and retailers sort of lean in to both incent demand generation as well as conversion. And we're starting to see that, you know, treats are seeing a little more elasticity than they were in the past. So that I think trend will continue to the back of the year. We've incorporated that in our guidance. We expect higher profitability even as a result of that and we'll pass that value on back to the consumer. And Sumit, we did see active customers decline by 95,000 quarter over quarter. What would you tell investors who maybe want to see greater confidence in the stabilization story and that return to growth? Yeah, you know, there are certain inputs to active customer formation. When you look at net customer acquisition, you know, it's tied to this trend of pet household formation, which is then closely linked to inflation. And that's keeping back demand for discretionary products or demand for, you know, categories such as vet food, et cetera. And so as I talk about the normalization, you know, we're seeing some green shoots there and we were pleased with our acquisition rate and they continued higher than our reactivation rate. The reactivation rate was particularly strong this quarter. We reactivated, you know, sort of mid-teens level higher number of customers than from a year-over-year comp point of view. And then we also saw greater retention of cohorts, especially starting the back half of 2022 cohorts. Second order purchase rates were good. So overall, you know, as you sort of put this together, we're quite encouraged with the efforts that were taken. It just has to sort of take a little bit of time through this normalization to occur. But in the meanwhile, you know, share of wallet with us continues to grow. We were up 9.5% on a year-over-year basis, reaching $560 share of wallet per customer, which we're very happy about. Some new areas of discussion on the earnings call moments ago, at least that I picked up on one, you're now opening vet clinics. You have four of these opened and it sounded like you have maybe a couple more coming in the back half of the year and you're testing paid membership. What's your hope with the vet clinics? And then on the paid membership front, how should investors think about that? Is it a more of a model like Target's doing with its new paid membership or is it something like Costco? Yeah, you know, on CHUI vet care, the clinic initiator, Brian, you and I have spoken in the past and health has been a strategic vertical for us for many years. And so what you're seeing is a culmination of all of the products and solutions and technology that we've built both for customers as well as for the veterinarian community or the past five years or so. And so imagine this kind of first party proprietary tech and product orientation that we've built and we said, well, what do you do with this? Well, we have two paths. We could offer it as a SaaS offering to clinics that are seeking this improved and sort of modernized experience and architecture as the industry progresses forward or we could dog food our own innovation. And we said, well, this is a great way of keeping the CHUI customer into our ecosystem, letting them experience the magic that so far had been led by product merchandise and making CHUI physically present with that experience into the marketplace. And so far we like it. Another positive trend is vet recruitment and retention is a real pain point in the industry. And so we want to be experienced forward to our veterinarian community as well. And so far, we've been able to attract and retain the right quality of veterinarians which we're super happy about. So broadly speaking, we believe this will be a flywheel, an ecosystem that'll continue to drive greater retention, greater new customers to the platform and also greater engagement from existing customers. So more to come, we've launched four, we've given guidance of about four to eight this year and so far we're on track. Your second point about membership. We feel, first of all, Autoship is a tremendous loyalty program for us. 77% of our net sales this quarter went through Autoship. At the same time, we believe there's an opportunity to bring forward the discovery of the CHUI platform to consumers, millions of consumers and paid memberships. When you go out and attract customers who are locked into the ecosystem with tremendous value, it can essentially be another choice for customers to select your platform. So we feel paid membership and Autoship are complimentary to each other. Lot to learn through the back half of the year. We've launched it to a cohort of customers starting last week and I'll be back here to talk more about it in the future. That's good to hear. You know, the push into the vet clinics really reminded me, it's expensive to own a pet. You know, something goes wrong with a pet, they break their leg, could be thousands of dollars out of pocket and I think that cost really surprised a lot of consumers. As an industry, is there any way to bring these costs down? And don't laugh at me here, but is there a way to create like Medicare for pooches? What do we need to do to help alleviate the burden on people that do own pets? It's actually a very good question because if you, you know, our submission behind the healthcare vertical is to make pet healthcare affordable, but also accessible, right? I'm sorry, accessible and affordable. And pet healthcare is expensive. And you know, it's a couple of ways that you could bring insurance down, cost down, for example, is the advent and the growth of the insurance category, right? When you look at kind of European countries or all the way to Australia and New Zealand, I mean, insurance has penetrated to sub kind of teens or mid 20% ranges. In the United States, it's sub 3%, right? But growing fast. So as one component of building into the Chewy Vet Clinic, we first launched insurance with a couple of high bar providers and now we can bundle in or layer in that insurance as part of our experience or the membership plan that you might actually, you know, procure when you're a Chewy Vet customer per se. And that greatly subsidizes, you know, it lowers the barrier for visits into the clinic and greatly subsidizes medical costs per se. Second thing is, you know, lowering overall cost to serve from a veterinarian and industry point of view, which you can do using smart technology and digitalized experiences. When you do that, you can essentially pass that value and that savings back to the customer, which is very much as part of our roadmap. So we're, you know, we're trying and the road ahead is long, but we're bullish. So I mean, I'm curious, what do you expect to see those spending trends to look like in an uncertain macro economic environment like we're in right now, just in terms of how much there is just on the willingness, the part of the consumer, the part on the customer here to spend on their pets during a time when they're forced to cut back on spending elsewhere. Are you seeing that at all? And will you, do you think, be forced to offer a bit more promotional activity in order to boost some of that business, specifically also what's going on within your vet's clinic? Yeah, you know, health is even more resilient than your typical food and supplies. So your typical consumables categories or non-discretionary categories, health is the most resilient of them all. In fact, when you survey pet parents, over 80% of them will tell you that they would rather treat their pet before they actually put, you know, their treatment sort of in picture per se. So it's a very sticky category from that standpoint. You know, and as we sort of continue to make healthcare more accessible and lower barriers and make it more affordable, you know, we're seeing, you know, you're in the age of sort of digitalization of animal health, right? And so food and supplies came first and now, you know, it's the time of health. And I believe we're credibly participating. So no, I don't see, you know, a tremendous risk of deflation or a tremendous risk of price compression in categories like these. You know, we've talked about some incremental discounting to incent demand generation in some other food and supplies type of categories, but health is likely more insulated. Sumit Singh, Chuwi CEO and Yahoo Finance Executive Editor, Brian Sazi. Thank you both so much for joining us. Great to see you guys.