Chewy (CHWY) Q2 2020 Earnings Call Transcript

Chewy (CHWY -2.54%)
Q2 2020 Earnings Call
Sep 10, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Chewy's second-quarter 2020 earnings call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Bob Lafleur, vice president, investor relations and capital market. Please go ahead.

Bob LaFleur -- Vice President, Investor Relations and Capital Market

Thank you for joining us on the call today to discuss our second quarter fiscal 2020 results. Joining me today are Chewy's CEO, Sumit Singh; and CFO Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today, have been posted to the Investor Relations section of our website, investor.chewy.com. A link to the webcast of today's conference call is also available on the site.

On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers, other facilities, customer service operations and future plans. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Also note that the forward-looking statements on this call are based on information available to us as of today's date.

We disclaim any obligation to update any forward-looking statements, except as required by law. For further information, please refer to the risk factors and other information in Chewy's 10-Q and 8-K filed earlier today and in our other filings with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today.

These non-GAAP measures are not intended as a substitute for GAAP results. Finally, this call in its entirety is being webcast on our investor relations website. A replay of this call will also be available on our IR website shortly. I'd now like to turn the call over to Sumit.

Sumit Singh -- Chief Executive Officer

Thanks, Bob, and thanks to all of you for joining us on the call. The strong demand we observed in the first quarter carried over into Q2. And once again, thanks to the high-quality execution from the Chewy team, we achieved record net sales growth and customer additions. In recent months, it has become clear that the retail industry, in general, and e-commerce, in particular, is going through a period of transformative change.

Growth curves that were supposed to play out over years have been compressed into quarters and even months. Over the past few years, we have invested in technology, new businesses, fulfillment capacity and in building an extraordinary team. This has prepared us to quickly adapt to the acceleration of our own growth curve and to provide top-notch service to the growing millions of pet-owning households in the U.S. who depend on Chewy.

We built chewy by putting the customer at the center of everything that we do. In a world of uncertainty, qualities like trust, convenience and customer service really matter, especially when it comes to caring for family or loved ones, whether they're people, pets or both. We have taken these millions of customer relationships and built a large base of repeat business that enables our rapid scaling and fuels our profitability on an accelerated timetable. As empowering as all of this is, we are just getting started.

In the next few minutes, I will discuss our Q2 results and then share some updates on the purchasing behavior of our newest customer cohorts as well as how we interpret their lifetime value potential. I will also update you on our fulfillment center network and distribution strategy, planning for the upcoming holiday season and then wrap up my remarks with some closing thoughts about Chewy's market share opportunity and how we fit in, in the broader pet e-commerce space. Finally, I will turn the call over to Mario to discuss our second-quarter results and guidance in more detail. Chewy's advantageous position in the race toward e-commerce and our culture of innovation and customer service resulted in another quarter of outperformance.

Q2 net sales were $1.7 billion, increasing 47% year over year. Autoship customer sales were $1.16 billion or 68.3% of net sales. We ended the second quarter with 16.6 million active customers, an increase of $4.6 million compared to second-quarter 2019, breaking last quarter's customer acquisition record. Net sales per active customer, or NSPAC, was $356, representing 3.2% annual growth after adjusting to exclude the extra week in 2018.

We delivered strong gross margins with Q2 actualizing at 25.5%, a 190 basis point increase year over year. By early Q2, we had cleared the backlogs and corrected the inventory imbalances that weighed on Q1 gross margins. Our newest business verticals, private label and healthcare combined contributed 140 basis points to the year-over-year expansion in gross margin. In the Rx business, we served our broadest customer base on record, serving millions of American households at a time when they needed us the most.

Additionally, our newest Rx sites in Kentucky and Phoenix became fully licensed in Q2 to fulfill customer orders nationwide, allowing us to further improve customer experience and optimize logistics costs. Another area of focus has been our hard goods business, which continued its strong growth in Q2, positively contributing to the overall gross margin trajectory. Within the hard goods categories, we expanded our mix of private label products and private label hard goods penetration reached 15% of net sales, providing clear gross margin benefits. We remain excited about the progress we are making across multiple initiatives ongoing within the company.

We executed tightly against our sales momentum while expanding gross margin and controlling costs to deliver our second consecutive quarter of positive adjusted EBITDA. Q2 adjusted EBITDA was $15.5 million at a margin of 0.9%, reflecting 340 basis points of year-over-year margin improvement. Now let me briefly touch on customer behavior for our new and existing customers over the course of the year. We continue to monitor the behavior of post-COVID customer cohorts we acquired in Q1 and Q2 for any notable variances against our more mature pre-COVID customer cohorts and are encouraged to observe a high degree of consistency in customer behavior between the 2.

The Q1 cohorts remained positively engaged and the initial engagement levels of the Q2 cohorts matched their Q1 peers. Overall customer acquisition rates remained above pre-pandemic levels and other metrics such as basket size, reorder rates and Autoship sign-up remained healthy and stable. We are encouraged by these trends. The new active customers we added in Q1 and Q2 of this year surpassed the total active customers we added across the entirety of 2019.

These new cohorts are not only large in number, but given their initial engagement levels, they are also potentially significant in their unrealized contribution to our future revenue and profitability. As with our mature cohorts, we expect their NSPAC to increase significantly over time, reaching approximately $500 by year 2 and over $700 by year 5. An exciting new development, however, is that unlike our earlier cohorts who were primarily purchases of food and essentials, we now have the ability to expose our newer cohorts to a large variety of purchase options earlier in their customer life cycle. For example, Rx prescriptions, a wide variety of hard goods options fueled by our private label products, or gift cards for friends and family members.

These expanded offerings allow us to serve the customer more fully from their initial purchase and expedite the capture of greater wallet share. This, in turn, allows us to scale their lifetime values or LTV beyond their historical ranges. This focus on new businesses and product innovation is critical for our long-term success, and each has been on the strategic road map that we've shared with our shareholders and investors since our IPO. It is also what will continue to amplify Chewy's growth and profitability flywheel as we look to the future.

Another important contributor to our ability to serve millions of customers is our dedicated fulfillment network, which continues to expand to meet the needs of our growing business. Our next fulfillment center, or FC, launch will be Archibald, Pennsylvania facility, which began shipping orders by mid-October. Archibald will be our 10th FC overall and our first automated facility. In addition to the Archibald and the North Carolina FCs, which were planned fulfillment center launches for 2020, just last week, we expanded our network with the opening of a new limited catalog fulfillment center in Kansas City.

This incremental fulfillment capacity added by Kansas City provides us the flexibility to effectively load balance across our other FCs and gives us available buffer capacity as we head into the busy second half of 2020. This new FC is a capital-light, high-velocity operation focused on fast fulfillment during peak demand periods. This facility was not part of our original FC network plan for 2020 and demonstrates our ability to improvise and adapt quickly to changing conditions in order to maintain business continuity and to protect customer experience. Looking a little further out, we also announced that we will be adding a second automated FC to our network in mid-2021.

This one will also be located in Kansas City. Mario will share some more details on this project shortly. This second center will give us option value as we scale operations in the Kansas City area from 2020 into 2021. By the end of 2020, our fulfillment center network will consist of 11 centers with over seven million square feet plus three pharmacy-focused fulfillment centers.

We believe this makes us one of the largest dedicated e-commerce fulfillment networks in the U.S. and is certainly unparalleled in the dedicated pet space. Expanding our distribution capabilities is just one of these we are taking in preparation for the upcoming holiday shopping season. The rapid changes we've seen in retail and e-commerce are likely to rewrite the rules of this year's holiday and cyber seasons.

Our preparations are already under way so that we are ready to ensure that our systems, inventory and staffing levels are in place and able to adapt to any contingencies. Also with the holidays in mind, we continue to expand our assortment of innovative, high-quality products that surprise and delight our customers. In Q1, we launched gift cards. In Q2, we took pet personalization to a whole new level by launching a service that allows pet parents to personalize dozens of people products like coffee mugs, water bottles and picture frames to celebrate their pets or create personalized gifts.

Using a first-of-its-kind 3D-powered user interface, pet parents can easily upload images and add customizable text and then interact in real-time with a 3D rendition of their item before ordering. We are excited to expand this experience to pet products like collars, ID tags and beds in our growing personalization catalog. Before I end, I would like to share some compelling data points about the rapidly growing online segment of the U.S. pet products market.

Industry data provider Packaged Facts predicts that online pet product sales in the U.S. will increase by $3.9 billion this year, with online sales gaining five points of market share year over year to reach 27% of all pet product sales. Against that backdrop, the midpoint of our 2020 guidance has us growing our revenue by approximately $2 billion year over year. In doing so, we would capture over half of the total forecasted growth of online pet product sales this year.

The Chewy team continues to execute against our strategic plan and we have never been more steadfast in our mission of being the most trusted and convenient destination for pet parents and partners everywhere. We are proud that despite all of the challenges our team members have faced on the job and in their personal lives, they remain focused on taking care of our customers and the pets who depend on them. I will now turn the call over to Mario who will provide the details of our second-quarter results and financial outlook. Mario?

Mario Marte -- Chief Financial Officer

Thank you, Sumit. Second quarter net sales reached $1.7 billion, increasing $546.3 million or 47.4% year over year. This marks the second time we have added more than $500 million of net sales year over year in a single quarter. Altogether, we added over $1 billion to the top line in the first half of 2020 as we attracted more customers to our platform, expanding the catalog and helped our customers build bigger baskets.

Autoship customer sales for the second quarter totaled $1.16 billion or 68.3% of total net sales and, again, topped $1 billion in a single quarter. Autoship customer sales increased 45.3% year over year, continuing the program's uninterrupted growth since launch. In the second quarter, we added 1.6 million active customers, bringing our total active customers to 16.6 million. On a year-over-year basis, we added 4.6 million active customers, an increase of 37.9%.

Growing our customer base is a key long-term driver for top and bottom line expansion, and we are pleased with the results so far this year having added more active customers in the first six months of 2020 than we did in all of 2019. Net sales per active customer, or NSPAC, as of Q2 2020 reached $356, an increase of 3.2% year over year when adjusting the second quarter of 2019 NSPAC to exclude the benefit of the extra week in the fourth quarter of 2018. As a reminder, net sales per active customer equals trailing fourth quarter net sales divided by the number of active customers at the end of the quarter. In this case, and through the third quarter of 2020, we adjust out the impact of the extra week in the fourth quarter of 2018 when presenting year-over-year growth versus 2019.

NSPAC was virtually flat quarter over quarter as a result of the large influx of new customers in Q2. Recall that all new customers are included in the active customer count, but their impact on net sales is limited to the most recent quarter. As we have shared on prior calls, customers spend more with us, the longer they stay with us. From their initial order, they discover the value, selection, convenience and best-in-class customer experience we offer, and they quickly consolidate their purchases with us.

As Sumit mentioned earlier, our most recent cohorts are displaying the same purchase and engagement consistency as our more mature cohorts, and we're encouraged by these trends. Gross margin in the second quarter reached 25.5%, increasing 190 basis points year over year, surpassing the low end of our long-term target range for the first time in a single quarter. Early in the quarter, we addressed the COVID-19-related backlog issues that were a drag on first quarter gross margin, limiting the impact from higher freight and packaging costs that we expect there will be a drag on second-quarter margins. Gross margin also benefited from a favorable sales mix into hard goods and strong contributions from our private label and healthcare offerings, which combined drove almost three-fourths of the year-over-year gross margin improvement.

Q2 operating expenses, which include SG&A and advertising and marketing, were $465.6 million or 27.4% of net sales, gaining 340 basis points year over year. SG&A, which includes all fulfillment, customer service, credit card processing fees, corporate G&A, corporate payroll and share-based compensation, totaled $343.2 million in the second quarter or 20.2% of net sales. This represents a 100 basis point improvement year over year and demonstrates our ability to scale this line while we continue to expand our fulfillment center network, invest in our team members and address the incremental costs driven by COVID-19, which in the second quarter, added $11 million or 60 basis points to SG&A. Q2 advertising and marketing was $122.4 million or 7.2% of net sales, gaining 240 basis points year over year.

While organic customer acquisition remained strong throughout the quarter, we did see input costs rise quarter over quarter as media rates began to recover from their Q1 lows. By accurately targeting our marketing efforts, we were able to add more than twice as many net active customers on a year-over-year basis in Q2 this year with just 11% more marketing spend. Over the long term, the CAC efficiency we have achieved with our 2020 cohort so far, combined with our strong expected purchasing behavior, should produce LTV-to-CAC ratios for them as a group that are well above their predecessor cohorts. Second quarter net loss was $32.8 million, and net margin improved 530 basis points year over year to negative 1.9%.

Second quarter net income, excluding share-based compensation of $37.8 million, was positive $5 million. Net margin, excluding share-based compensation, was positive for the first time ever, improving 370 basis points to 0.3%. Second quarter adjusted EBITDA was $15.5 million, and adjusted EBITDA margin improved 340 basis points year over year to 0.9%, exceeding breakeven for the second time this year. Turning now to free cash flow.

Q2 free cash flow was negative $56 million, reflecting $28.9 million of negative cash flow from operating activities and $27.1 million of capital expenditures. The negative operating cash in Q2 was primarily a function of increasing our inventory levels to match current and anticipated demand levels and to protect the customer experience. Capital investments continue to be focused on capacity build, including cash outlays for our new fulfillment center in Archibald, Pennsylvania, that is scheduled to open next month. Before I turn to guidance, I want to remind you of the near-term investments we are making that we believe will enable us to scale the business and move us forward along the path to profitable growth.

Our goal is to provide you with further clarity on the rest of 2020 and help you think about the shape of the P&L and free cash flow over the next six to 12 months. We recently announced plans to launch our 12 fulfillment center. There's one in the Kansas City area in the second half of 2021. This facility will have the same automation layout as our Archibald, Pennsylvania facility that is set to open in mid-October.

A portion of the initial investments associated with this facility will be recorded this year. First, a reminder that all of fulfillment costs are included in SG&A. So launching new facility requires capital investments, inventory build and a short-term increase in SG&A as a percent of net sales as we hire and train personnel ahead of ramping the site to full capacity. Costs associated with the recent and upcoming launches of the Kansas City and Archibald facilities will be reflected in our Q3 and Q4 financials and are incorporated into current guidance.

Second, I want to reiterate the benefits we expect to gain from FC automation: up to a 60% improvement in safety and economics-related metrics, 25% increase in throughput capacity per square foot, 50% increase in labor productivity and 30% reduction in fixed and variable fulfillment cost per unit. These investments will also allow Chewy to maintain our competitive edge as well as our coveted position as a top experience provider. This is especially critical since COVID-19 is rapidly influencing the way we live, shop and serve our customers. Now to guidance.

As we enter the back half of 2020, we have good visibility on a sizable share of our future sales, thanks to the recurring nature of our Autoship program. At the same time, we acknowledge that opportunities and risks exist side-by-side in today's unique and operating environment, and we are prepared to capitalize on opportunities and mitigate risks as and when they arise. So with that, for the third quarter, we are expecting net sales to be between $1.70 billion and $1.72 billion, representing year-over-year growth of between 38% and 40%. For the full-year 2020, we are expecting net sales to be between $6.775 billion and $6.825 billion, representing year-over-year growth of between 40% and 41%.

As our guidance suggests, we expect to deliver nearly $2 billion of net sales growth in 2020, divided roughly 50-50 between the first and second half of the year. As Sumit indicated earlier, we expect to capture over half of the growth in online pet product sales that the industry experts predict for 2020. Full-year 2020 adjusted EBITDA margin is expected to be approximately breakeven plus or minus 30 basis points. We are holding our adjusted EBITDA guidance constant with the guidance we gave last quarter.

While we have good visibility on the demand side of the business as we enter the second half of the year, there are some areas of the current operating environment where we don't have full clarity on potential cost headwinds. For example, media costs in Q3 and Q4 are likely to see some upward pressure from factors like the economy continuing to open, the upcoming election and increased competition as we approach the holidays. Similarly, during peak periods, we could make additional investments and employee benefits or freight and logistics to respond to elevated volumes, protect customer experience or both. Our present guidance reflects these potential headwinds, many of which are attributable to market conditions related to COVID-19 and its impact on the broader economy and e-commerce more specifically.

We view these as nonrecurring in nature and don't see them affecting the underlying profitability of the business that we demonstrated in the first half of 2020 and expect to carry forward into 2021. I will conclude by saying that our Q2 results demonstrate our continuing ability to attract and retain customers, gain market share, achieve scale and operate profitably. We remain optimistic about our future and look forward to the second half of 2020. With that, I'll turn the call over to the operator.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Mark Mahaney with RBC Capital Markets.

Mark Mahaney -- RBC Capital Markets -- Analyst

Thanks. I want to ask about the NSPAC outlook. And could you just detail how that NSPAC goes from whatever $350, $356 now to the $500 to $700. I know you just — I know you're talking about that with particular cohorts.

As the overall customer base ages, you'll inevitably drive up there. But just talk about how that happens. Is it greater frequency? Is it spend across different categories? I'm sure it's all of the above, but what have you typically seen in terms of the drive up of that NSPAC? Thank you very much.

Mario Marte -- Chief Financial Officer

Hi, Mark. This is Mario. So I'll take the question. What would happen is, like in the first quarter, we had a record influx of new customers that diluted NSPAC in the second quarter.

And so it was basically flat quarter over quarter, but up 3.2% year over year. And I think you have the dynamics right that as we add more new customers, that affects NSPAC in the short term. But over time, those customers mature and they shift their spending to us. And so then your question of how does that evolve over time? It's a mixture of, as you said, all of the above.

Not only do they find the selection, convenience, price, customer service to be so appealing that they move their spending to us, but we also continue to expand the catalog and the categories that we serve them, and that increases they're spending with us over time. And you're right to think that, as we have shared within the past, first year tends to be about $150, $200. By year 3, that grows $100, $200. By year four or 5, you're in the $500, $600 range.

So the longer they stay with us, the more they spend with us. But it's a combination of all the things you mentioned.

Sumit Singh -- Chief Executive Officer

Mark, this is Sumit. I think it's helpful to remember that the number that you're quoting, right? The number, the NSPAC number that we're quoting is a weighted average number. And when we look at the number of customers that we've acquired, so the net additions that have happened in the last three years form a bulk of the customers on the platform. So just by the mathematics of it, the cumulative rate gets dragged down by the maturity of the cohorts that we bring on.

But when you look at our older cohorts that have been active with us over four, five, six years, those are the cohorts that are spending north of $500, $600, $700. And so I think that's an important consideration, which is why in the past, we've said, it's really important for us to bring customers online. And then what we gain confidence is we build relationships with these customers, and they spend, the more they spend, the longer they stay with us, the more money they shift from their share of wallet from their basket over to Chewy. And so you take that dynamic and you take the dynamic of, let's say, the food and supplies market in the North American space, and you take a $100 billion pet space, you take 65% of that as just food and supplies and you take 90 million households, that math is roughly about $700 per share of wallet per household just attributed to food and supplies.

And so when you start putting these two together, and you see results in the way that we go to market and engage these customers and the offerings that we're offering, that Mario suggested, that's how the math works out.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Thank you so much.

Operator

Our next question comes from Brian Fitzgerald with Wells Fargo.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks, guys. A couple of questions. The first one is you seem to continue to acquire customers very efficiently in the quarter. Anything you could tell us about the media pricing environment during the quarter, exiting the quarter.

And then channels giving you the best leverage or color on the media mix there? And then I have one follow-up.

Sumit Singh -- Chief Executive Officer

Sure. Brian, Sumit here. So not much to break that down, but what we are continuing to see is, as anticipated, channel input cost across an array of media began to increase from the lows that we saw in Q1. And so our marketing team has had to smartly pivot to make the level of investment.

And one thing that benefits an engine like ours is that because we are efficient in going to market on the performance side, we're able to also attribute spend on short-term basis and change that spend if we don't see the yields coming back in. So for us, it's all about guiding ourselves to the LTV-to-CAC metric. And then on top of that, we're continuing to find the efficient frontier. So for example, as you move out, Mario alluded to media cost due to election year.

And typically, what happens is that you should expect TV costs to start going up but also visibility goes up or viewership goes up during this time. And there's a headwind and a tailwind that actually brings to the equation. I think what's a little bit murky this year is how due to pandemic, if the viewership is scaled back, how that actually impacts media cost. So we're watching all of this, but at least on the performance side, where we spend the bulk of our money, we're more targeted, and we have the ability to dial back or dial-up as the yield comes in.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Got it. And the other one I just had was on the new automation, and I want to know if you kind of compare or contrast the CapEx and the OpEx footprint of those facilities, the new automation ones versus the rest of the network. Is there an opportunity to upgrade or augment some of your existing facilities with some of this automation you're talking about?

Sumit Singh -- Chief Executive Officer

Yes. I mean, absolutely. We've built — in the last few years, we've built our existing network with a point of view of if the data comes into our expectation like where the data points that we're providing, we have an opportunity to go back and retrofit or upgrade our existing facilities. And automation for us is a strategic choice, and we believe that now more so than ever, we have confidence that we're making the right choice in investing in automation to be able to get out the benefits across safety, variable cost as well as full customer — full cost per unit for the network.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks. Appreciate it.

Operator

Our next question comes from Doug Anmuth with JP Morgan.

Douglas Anmuth -- J.P. Morgan -- Analyst

Thanks for taking the question. Sumit, I was hoping you could just talk a little bit more about the services marketplace, potentially just if the pandemic is perhaps accelerating your thinking there at all and just how you'd think about what a potential product could look like and then also monetization around that product. Thanks.

Sumit Singh -- Chief Executive Officer

Hey there. Good to hear from you. When we think about services, first of all, and the concept of a marketplace, we think about it broadly. So we're not really pegging ourselves to a product-oriented marketplace or a particular retail environment of a service-oriented marketplace.

We believe us helping customers in the health and wellness space where a lot of customers are migrating toward finding more and more information, especially due to vet clinics closed, is a service that we could provide. We believe offering up our assortment to small business providers at a time when they needed the most could be a service that we could provide. Pet insurance could be a service that we could provide. So services for us is a broad term, Doug.

And there's not much to share regarding our progress other than the fact that we continue to evaluate ideas and put our thought behind it. And when we have something more to share, I'll come back and share it with you.

Operator

Our next question comes from Lauren Cassel with Morgan Stanley.

Lauren Cassel -- Morgan Stanley -- Analyst

Thanks so much. Great. I just wanted to ask about strategies that you're thinking about to retain these new buyers that you've acquired in the back half of the year and into 2021. And then sort of on the same vein, how are you thinking about marketing spending in the back half of the year given some of the efficiency that you've seen in the first half?

Sumit Singh -- Chief Executive Officer

Lauren, it's Sumit, I'll take that one. So first of all, we are encouraged by the fact that the new customer cohort is displaying behavior, which is consistent to our older cohorts, which then tells us that we don't have to do something unnatural to engage them. What we are also encouraged by the — is the fact that we have different choices for them to engage with. For example, if you look back a couple of years, you had the choice of either buying food or buying your supplies from us.

Today, as a customer, you have a much broader array of choices. And so when you really think about how we deploy marketing now for engaged customers, it's about understanding their life cycle and at what point do we expose them to these offerings and how do we smartly convert them from one vertical or complementary offerings to their portfolio to accelerate their basket size relative to older cohorts. So that's how we're thinking about it. Number — your second part of the question is efficiency in the back half of the year or how we look at marketing outlook.

As I alluded, we expect channel input costs across an array of media to begin to increase. And our team — one, we expect organic traffic and customer acquisition trends to remain elevated relative to pre-COVID levels. Then is the notion of how paid marketing should be executed. And there, we're going to continue to spend money with the operating philosophy of either driving the business to cash neutrality or until we hit the efficient frontier and keeping LTV-to-CAC ratios as our guiding point.

Overall, we expect net customer adds to be higher than pre-COVID levels. And overall, we expect to deliver marketing efficiency from a year-over-year point of view.

Lauren Cassel -- Morgan Stanley -- Analyst

Right. Thanks so much.

Operator

Our next question comes from Dylan Carden with William Blair.

Dylan Carden -- William Blair and Company -- Analyst

Yeah. Hi. Thank you very much. Just curious if you could touch on the behavior you're seeing with the pharmacy customers, if there's anything different as far as attachment rate.

And then also, as you look to the back half, kind of keeping the — at least the earnings guidance relatively in line on higher sales, if that's just maintaining some sort of conservatism just given the visibility or if you're seeing kind of incrementally higher costs or reason to be cautious? Thank you.

Sumit Singh -- Chief Executive Officer

Dylan, it's Sumit. I'll take the first one, and Mario will take the second one. On pharmacy, not much different to report. We are encouraged.

By the way, pharmacy continues to resonate with our customers, and we continue to be pleased with the results. As we've noted, pharmacy made positive contributions to the company's Q2 revenue and margin expansion goals, and we continue to benefit from the efficiencies provided by the expanded network of our Rx fulfillment centers that allows us to deliver an even sharper experience and faster delivery times. So we continue to expand the proposition which will make Chewy a stronger proposition for customers either wanting to adopt pharmacy for the first time or existing customers who want to try out our pharmacy platforms, and we're happy about that.

Mario Marte -- Chief Financial Officer

And Dylan, this is Mario. For the second part of your question, I'll start off by saying that we feel good about being able to provide guidance. And like always, we weigh the risk and opportunities, and our guidance reflects the balanced view of optimism versus what's less clear in the environment that we're operating in. So you asked specifically about the bottom line, but let me just give you the top line and the bottom line so you can see how we arrive at it.

But for the top line, Autoship and the predictable customer behavior that we've seen over time is what gives us the visibility to be able to raise the guidance by $200 million and guide to almost $2 billion increase year over year. For the bottom line, though, we held the EBITDA, as you mentioned, flat to the last call, and that's for two main reasons. One is there are some potential cost headwinds. As Sumit has mentioned, variability and media costs, higher logistic expenses and potentially short-term costs related to COVID-19.

And it's how much of these headwinds materialize in the second half that will drive us to one end or the other end of the range. And of course, we're going to continue to manage, to actively manage the headwinds using all the data available to us. So the second portion is that we may choose to make some short-term investments in customer experience, marketing and other areas that may impact profitability in the short term but are exactly the kind of strategic decisions that we make on a regular basis that drive our growth over time. So our guidance provides us the flexibility to make those types of investments and decisions in the back half.

Dylan Carden -- William Blair and Company -- Analyst

Makes sense. Appreciate it.

Operator

Our next question comes from Seth Basham with Wedbush Securities.

Seth Basham -- Wedbush Securities -- Analyst

Good afternoon. Thanks for taking my question. I have a question about the behavior of the pre versus post-COVID customer cohorts. You're talking about being able to expose these post cohorts or post-COVID cohorts to a larger variety of purchase options.

It seems like they're not spending more at their life cycle point than pre-COVID customer cohorts. Is that correct? Or if not, please correct me, if so, please provide some color.

Sumit Singh -- Chief Executive Officer

No, Seth, short answer, that's not correct. In fact, I think Mario alluded to this in his script as well, that the LTV-to-CAC ratios of these newer cohorts are superlative compared to the older cohorts. And it's not just because of the CAC efficiency, it's also because of the strength in the LTV that we're seeing.

Seth Basham -- Wedbush Securities -- Analyst

OK. That's excellent. Understand. And then secondly, as it relates to fulfillment costs, you saw deleverage this quarter that was a little bit more than last quarter.

You talked about potential headwinds going forward. Could you enumerate or elaborate on the headwinds that you might expect going forward and whether or not we should see more or less deleverage in the back half relative to the first half?

Mario Marte -- Chief Financial Officer

Fulfilling cost, we touched on that as part of SG&A. And what I mentioned in my opening remarks is that we would see a deleveraging related to opening our new fulfillment center. That happens every time we open a new FC. Because at the beginning, we have to recruit and train and ramp, from a productivity standpoint, those new team members.

But over time, the productivity increases, volume in that facility increases, and that effect ameliorates. So it's a temporary effect of opening up new fulfillment centers.

Sumit Singh -- Chief Executive Officer

And Seth, a point about headwinds on the labor side or the investments is essentially us trying to anticipate how playing through the back half of the year while continuing to live in a pandemic is going to pan out. There's lack of clarity on the stimulus side, and they are changing macroeconomic environments at this point. And we just stand ready to invest in short-term wage and benefits, if we need to align our labor curves with the demand forecast that we have to execute to protect customer experience.

Seth Basham -- Wedbush Securities -- Analyst

Understood. Thank you.

Operator

Our next question comes from Oliver Wintermantel with Evercore ISI.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yeah. Hi. Good. Good afternoon.

My question is regarding the sales cadence throughout the quarter, how you entered the quarter and how — at what velocity you exited the quarter? And then if you could give us maybe like an outlook or how it's trending in the third quarter so far? And then the follow-up question would be advertising revenue opportunities on your own side. Thank you.

Mario Marte -- Chief Financial Officer

Oli, it's Mario. I'll take the first part, and Sumit will answer the second part. But to your — the first question, net sales in customer acquisition in August were consistent with our Q2 exit rate. And so the best way to describe the current pace of customer acquisition is that we are running above pre-COVID levels but below the peak rates we saw in March and April.

And the guidance we provided reflects it.

Sumit Singh -- Chief Executive Officer

Oli, its Sumit. Not much to add to the advertising revenue opportunities on our side. When we have something to share, we'll come back and share it.

Operator

Our next question comes from Deepak Mathivanan with Barclays.

Trevor Young -- Barclays -- Analyst

Hi, guys. It's Trevor on for Deepak. Two ones from us. I'm just dovetailing on one of the earlier questions.

Now that you have six months of data on post-COVID cohorts, can you give us any color on like average basket sizes, frequency and churn there? I know you gave some comments there on spend levels, which is very helpful. And then second one, dovetailing on that, last quarter, you flagged about $70 million in pantry stocking contributing to revenue. Any update on that metric this quarter? Have you seen that kind of stabilize? Or have you seen that inventory that's in pantry drawdown? Thanks.

Sumit Singh -- Chief Executive Officer

Sure. I'll take both of these. First of all, we're not seeing pantry destocking. We continue to see high levels of engagement from our customers.

And as we alluded to in the Q1 call, we don't expect the pantry destock impact to come in or at least come into perspective so quickly. So not much more to say there. And on the new cohort trends and basket size reorder, so without specifically commenting, we continue to see basket sizes are bigger or larger and their other metrics such as frequency, mean time to order, purchase rate, Autoship subscriber rates, etc., are consistent with our mature cohorts.

Trevor Young -- Barclays -- Analyst

Thanks.

Operator

[Operator instructions] Our next question will come from Brent Thill with Jefferies.

John Colantuoni -- Jefferies -- Analyst

This is John Colantoni on for Brent. Thanks for taking my question. When we back into implied Q4 sales using Q3 and full-year guidance, we get somewhere around low 30s growth, which implies a moderation from Q3 guidance. Should we take this as conservatism? Or is there something you're seeing in customer trends or from competition that leaves you to believe top line growth will start to slow toward the end of the year? Thanks.

Mario Marte -- Chief Financial Officer

Hi, John. It's Mario. I'll take that one. Our updated guidance delivers nearly $2 billion of sales growth this year and just over half of that coming in the first half and the remainder in the second half.

And that $2 billion equal to 40% growth year over year, which is the same growth rate we had in 2019, but off a larger base. So the growth in absolute terms is quite meaningful in the second half and right in line with what we saw in the first half. And I think the other thing you should take away is that our projected growth of $2 billion this year is equivalent to more than half of the total growth in the market for online. So pretty significant.

John Colantuoni -- Jefferies -- Analyst

Thanks.

Operator

Our next question is a follow-up from Dylan Carden with William Blair.

Dylan Carden -- William Blair and Company -- Analyst

Yeah. Thanks for coming back in here. Just curious on the hard goods, the total growth in that category is 52%. What drove that acceleration? And am I right in that the private label hard goods is actually in the other line item? And if so, kind of if you're seeing private label hard goods grow ahead of that? And is that having sort of a benefit for the hard goods category more broadly? Thanks.

Sumit Singh -- Chief Executive Officer

So yes, private label hard goods is in the other category. And we attribute the hard goods growth. Growing hard goods has been an important part of our growth strategy, and we've alluded to this in the past ever since our IPO. And it's been an important part of the growth strategy, both on the branded side as well as the central driver of our private label hard good business as well.

So what you saw in Q2 is the result of ongoing efforts in investing behind the business, both in going to market, smart merchandising, assortment and higher quality products, both across product lines, but also expansion of price points in addition to some external factors that we benefited from, such as increase in pet adoption and engaged pet parents. Sorry, if there was a second question, I'm going to have you repeat that, please.

Dylan Carden -- William Blair and Company -- Analyst

Yes. No. I was just curious. I guess I am right that the private label hard goods is embedded in the other category.

So I guess I was just curious if the — you called out private label hard goods, I think, in the gross margin comments. It would stand to reason that you're seeing private label hard goods maybe grow ahead of your third-party hard goods and if there's some benefit there, I guess, in the broader hard goods category growth.

Sumit Singh -- Chief Executive Officer

All right. I mean, first of all, recall that our private brand strategy is to develop high-quality customer affinity products and bring them to life. We don't necessarily — we don't create products that compete one-to-one head-on. That's really not our strategy.

On the hard goods side, where product lines are commoditized or people or customers may appreciate diversity of choices, yes, we're super-encouraged by the way that customers are interacting with our products, the star rating that we're receiving for these high-quality products as well as the acceleration and the meaningful penetration that they're driving into overall hard goods, reaching 15% at Q2 exit. And Dylan, this is Mario...

Dylan Carden -- William Blair and Company -- Analyst

And 15% is total...

Sumit Singh -- Chief Executive Officer

Yes, 15% penetration for hard goods private label.

Dylan Carden -- William Blair and Company -- Analyst

Mario, yes. Sorry.

Mario Marte -- Chief Financial Officer

Yes, I may have misheard you, but I thought you — I heard you say 52% growth in hard goods, but actually, it grew 72% year over year in the quarter.

Dylan Carden -- William Blair and Company -- Analyst

OK. I just have some bad numbers perhaps.

Operator

This will conclude our question-and-answer session, and I would like to turn the call back over to management for any closing remarks.

Sumit Singh -- Chief Executive Officer

Thanks, all. Have a great evening.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Bob LaFleur -- Vice President, Investor Relations and Capital Market

Sumit Singh -- Chief Executive Officer

Mario Marte -- Chief Financial Officer

Mark Mahaney -- RBC Capital Markets -- Analyst

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Douglas Anmuth -- J.P. Morgan -- Analyst

Lauren Cassel -- Morgan Stanley -- Analyst

Dylan Carden -- William Blair and Company -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Trevor Young -- Barclays -- Analyst

John Colantuoni -- Jefferies -- Analyst

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