Chewy (CHWY) Q4 2020 Earnings Call Transcript

Chewy (CHWY -3.05%)
Q4 2020 Earnings Call
Mar 30, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Chewy fourth-quarter and full-year 2020 results call. [Operator instructions] Note this event is being recorded. I would now like to turn the conference over to Robert LaFleur, president of investor relations. Please go ahead.

Robert LaFleur -- President of Investor Relations

Thank you for joining us on the call today to discuss our fourth-quarter and full-year results for fiscal 2020. 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 our 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-K 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 measurements 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 and in our 10-K. 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 included 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. As we gathered for this call a year ago, we were just beginning to realize the scope of the COVID pandemic. Looking back, I'm incredibly proud of the way Chewtopians came together to execute through this incredibly challenging year. As a leadership team, we communicated frequently and honestly about how we would navigate the pandemic with our team member safety in the forefront.

We made sure our teams had safe and healthy workspaces and implemented new team member-friendly policies and benefits. In response, our teams redoubled their dedication to our customers and made sure that their pets receive the vital products and care that they needed. In the face of surge in volume, we kept our supply chains operating and our fulfillment centers or FCs open. Our corporate staff and customer service teams quickly adapted to working from home, and our tech and product teams solved challenge after challenge to seamlessly foster that transition.

Despite the disruptions caused by COVID, and in some cases, because of them, we accelerated the rollout of several strategic initiatives, including the launch of eGift cards and personalized products, the introduction of service innovations like our telehealth offering, Connect with a Vet, and compounding services, and the opening of our first automated and first high-velocity fulfillment centers. These accelerated rollouts speak to the adaptability and the innovative spirit of our entire Chewy team. And even with the COVID backdrop, our teams remain relentlessly focused on the strong execution required to deliver a superior customer experience to over 19 million pet parents who trusted us to deliver on that promise. It is for all these reasons that 2020 will go down as a landmark year in Chewy's history.

Over the next few minutes, I will briefly discuss our Q4 and FY 2020 results. I will then use the balance of my remarks to outline our long-term vision for Chewy and why we believe this vision leaves us well-positioned for long-term sales and profitability growth. After that, I will turn the call over to Mario to discuss our fourth-quarter and full-year 2020 results in greater detail, as well as our first-quarter and full-year 2021 guidance. Q4 net sales increased 50.8% year over year to $2.04 billion, bringing 2020 full-year net sales to $7.15 billion or 47.4% annual growth.

Exceeding $2 billion of quarterly net sales is another milestone for us. It took us 7.5 years to reach our first $1 billion quarter and only two years to reach the $2 billion quarterly sales mark. Active customer growth and continued strength in purchasing behavior were key drivers of Q4 and full-year 2020 momentum. During Q4, our new customer acquisition pace accelerated relative to Q3.

Customer reactivations increased by 40%, and customer retention improved by 240 basis points. As a result, we added 1.4 million net active customers in the fourth quarter and ended the year with 19.2 million active customers. As we have shared with you in the past, efficiently adding new customers to our platform and then growing their share of wallet is a key part of our growth strategy. For the full year, we added 5.7 million net active customers, reflecting a 42.7% annual growth.

The customer cohorts we acquired in 2020 were highly engaged and displayed similar and in some cases, stronger purchase and repurchase behavior compared to legacy cohorts. These positive behaviors were driven by a wider product assortment and by a growing set of customer offerings, such as gift cards, personalized products, compounding services, and Connect with a Vet. Assessing our progress by business vertical, we are pleased to note that our core consumables business remains strong, and we continue to gain traction in hardgoods, healthcare, and proprietary brands. Looking at the Q4 trends within our key verticals, third-party hardgoods sales grew 40% faster than the business overall, and proprietary brand hardgoods sales more than doubled year over year.

Further within hardgood, our proprietary brand's penetration increased 570 basis points year over year to reach 21%, continuing the share gains we have reported throughout the year. These results provide us confidence that we are on the right track and that there is a lot of opportunity in front of us to continue winning customers' hearts and minds in these areas. Now, let's review our margin performance. We are encouraged to see our effort to increase customer lifetime value, or LTV, drive higher margins.

Fourth-quarter gross margin expanded 300 basis points year over year to 27.1%. Full-year 2020 gross margin was 25.5%, up 190 basis points versus 2019 and a record high on a full-year basis. Approximately half of our Q4 gross margin improvement came from structural and sustainable drivers like higher penetration rates into higher-margin verticals like hardgood, proprietary brands, and healthcare. Notably, on a year-over-year basis, we executed a 510-basis-point mix shift out of lower-margin consumables and into higher-margin verticals like healthcare and hardwood.

Higher gross margins and rigorous focus on bottom-line execution translated into another quarter of positive EBITDA. Fourth-quarter adjusted EBITDA was $60.8 million, translating to adjusted EBITDA margin of 3%, a 340-basis-point improvement year over year. For the full year, adjusted EBITDA was $85.2 million, and adjusted EBITDA margin improved 290 basis points to 1.2%. Both Q4 and full-year 2020 adjusted EBITDA includes a $15.9 million benefit from releasing a prior tax reserve.

And even if we back out this one-time tailwind, we generated $150 million more in adjusted EBITDA in 2020 than we did in 2019, demonstrating our ability to successfully scale the business and drive incremental profitability. Our performance and dynamics of this past year have provided us with an advanced look at Chewy's future. We believe that our future is bright given the size of the opportunity in front of us and our relentless focus. Moving forward, we plan on executing against this opportunity in order to realize even greater scale and improved profitability.

I will focus the balance of my remarks today, outlining the scale of the large and growing opportunity in front of us, and in sharing with you the ways we intend to meet the challenge of realizing it. Let's start with three important trends and why we believe Chewy is well prepared to capitalize on that. First is the increase in the number of pet-owning households. Pet adoption surged in 2020 as millions of people sought out comfort, companionship, and the joy of pet parents.

According to industry analysts, the number of pet-earning households increased by 5.7% in 2020, a significant acceleration from the pre-pandemic five-year CAGR of 0.6%. Looking at our own data, it is clear to us that these new pet parents are joining us early in their journey. For example, in 2020, we observed a 35% year-over-year increase in the creation of pet profiles for puppies and kitten and a 40% increase in the creation of profiles for newly adopted pets. We get excited about these insights because that newly adopted Chewy puppy is going to grow up, eat more food, and shred more toys, leading to a long-lasting relationship with us, resulting in a stream of recurring revenues for years to come.

Understanding our customers and anticipating their wants and needs, help us create sustainable advantages to win in the pet space. The second trend is the size of the U.S. pet market opportunity. And our ability to expand the competitive playing field.

Today, we compete in roughly 70% of the $100 billion U.S. pet market, and we do so primarily in the areas of food supplies and prescription drugs, and diet. That leaves us with an additional $30 billion opportunity in healthcare and services to grow into, and we are confident in our vision and our ability to do so. Equally exciting to note is that we are continuing to increase our penetration into a growing U.S.

pet market that is expected to reach $120 billion by 2024. At $7 billion in net sales, Chewy is clearly only scratching the surface of the overall market opportunity in front of us. And finally, the third tenet is growing e-commerce penetration within the U.S. pet market.

Online penetration rates in the retail food and supplies category are estimated to have grown from 7% in 2015 to 30% in 2020 and are expected to reach 53% by 2025, which is in line with the current online penetration rate of categories like books and electronics. Further, as we are observing, healthcare and services have already begun to shift online, and we believe this trend will continue and accelerate. Equally importantly, we believe this shift in favor of e-commerce channels are durable and largely permanent. This is where we believe Chewy has won and will continue to win for years to come.

Years of preparation and focus have positioned us as the Internet-preeminent neighborhood pet store and a leading pure-play e-commerce company in the pet space. We look forward to a future marked by ongoing innovation, winning customer hearts and minds, and growing market share. Overall, we see 2020 and the impact of COVID as much more than a one-time growth accelerator. We see the past year as a catalyst that sped up a secular shift toward e-commerce that was already under way.

There are multiple growth vectors ahead of us, which make the market opportunity so compelling and moving forward, we plan to continue following the growth and margin expansion road map that we have used since our IPO. That road map consists of the following: acquire new customers, increase share of wallet for existing customers, expand assortment, grow proprietary brands and healthcare offering, launch services; and when the time is right, expand the business outside of the U.S. As we continue to successfully execute in each of these areas, we will also continue to invest wisely to grow our base of recurring revenues, scale our operating expenses and drive profitable growth over the long term. Let's look at how our efforts are translating into tangible results.

Increased wallet share is a truly powerful growth catalyst. We captured 12% more initial wallet share from our 2020 new customer cohort than we did from their 2019 predecessors, and we accomplished this while absorbing our largest new customer cohorts ever. An additional data point, which lends us confidence that our efforts are delivering results is the fact that year 1 contribution profit per customer, which we calculate as gross profit less variable costs, has increased at an average annual rate of 16% over the past two years. Reiterating what I mentioned earlier in my comments, these gains across share of wallet and profitability are being realized as a direct result of our efforts and reflect the impact of catalog extension, improved discoverability, and the incremental contribution from high-margin verticals like healthcare, hardgoods, and proprietary brands.

In the past three years, we have nearly doubled our total SKU count, including executing a sevenfold increase in higher-margin proprietary brand SKUs. Within healthcare, we are unlocking value for ourselves, our customers, and our partners in this large and growing $35 billion market opportunity. You will likely recall that we recently launched two services in the healthcare space: Connect with a Vet and Compounding. In 2020, these services were live just for a few months.

But in 2021, we will get a full 12 months of financial benefits these services provide, as well as vital knowledge that we continue to accumulate as we operate and refine these businesses. In the year ahead and beyond, we will remain focused on expanding our customer base. Sustained improvements in customer LTV continue to support our strategy of disciplined investing in advertising and marketing. As we quickly and efficiently convert new customers into engaged active customers, our growing customer base, in turn, generates the profit that we then reinvest into acquiring even more customers, thereby completing the flywheel effect that drive both top-line and bottom-line growth.

Additionally, we expect to continue leveraging SG&A. Along the way, we may choose to make incremental investments to strengthen our employee value proposition. However, our playbook shows us offsetting these investments over time with efficiencies from the technology and productivity enhancements that we began implementing in 2020. We are confident that these investments will drive long-term growth and profitability.

More specifically, in 2021, we will invest approximately $60 million in higher wages and benefits, the bulk of which will be directed to our fulfillment and customer service team. This investment is necessary to help us attract and retain team members, drive higher employee engagement, and increase productivity over time. At the same time, we expect to see productivity gains accelerate in 2021 from the technology and automation investments we have made in our fulfillment center network. You may recall that in October 2020, we opened our first fully automated FC.

A month earlier than that, we began realizing a different style of efficiency when we opened our first limited catalog, High Velocity FC. Given their launch timing, these FCs provided only modest ramp benefit to us in fiscal 2020. In 2021, we expect to realize accelerated productivity gains from their full-year operations. We also expect to open our second automated fulfillment center in Q2 2021 in Kansas City and another limited catalog facility in Q3 2021.

Additionally, in 2022, we will begin automation retrofits at select fulfillment centers. We will keep you apprised of the specific timing of these events on our upcoming calls. We believe these investments in our people and automation are not only prudent, but they also have the potential to drive step-function changes in our variable cost structure and contribute meaningfully to effective SG&A leverage levels. Finally, I would like to share that having achieved our first full year of positive adjusted EBITDA in 2020, and our first quarter of positive net income in Q4, we have taken a meaningful step forward on our path to profitability and in demonstrating our ability to get big fast and get fit costs.

Going forward, our margins may fluctuate quarter to quarter, but we believe our profit trajectory is clear and positive. I will end my comments by reiterating that 2020 was an incredibly challenging and unpredictable year for all of us. During this time, Chewy performed exceptionally well and made significant strategic and operational program. We navigated the safety concerns of the pandemic and kept delivering for our pet parent and business partners.

We proactively grew our market share by offering a low level of service to the millions of new customers who adopted pets during the pandemic. Further, we capitalized on the accelerated and sustainable shift of consumers to e-commerce channels. As a result, we grew our customer base by 43% and ended the year with 19.2 million active customers. Perhaps most importantly, we dramatically increased our market size by launching new services in the pet health and wellness space.

These expanded offerings help us reach additional customers and improve our ability to increase wallet share with our existing customers. We are entering 2021 with significant momentum, and we are confident in our ability to deliver. With that, I will turn the call over to Mario. Mario?

Mario Marte -- Chief Financial Officer

Thank you, Sumit. We knew the 2020 holiday season will be unprecedented, and we were prepared for a range of outcomes. The season got off to an early and strong start and market conditions remained favorable throughout the balance of the quarter. Fourth-quarter net sales were $2.04 billion, reflecting 50.8% year-over-year growth.

This brought full-year 2020 net sales to $7.15 billion, a $2.3 billion or 47.4% increase year over year. Along with accelerated customer growth, we also saw sustained high levels of customer engagement as traffic and conversion metrics improved from December into January, reversing their typical seasonal pattern. Pricing and promotions are usually a reflection of the broader market environment, and both remained balanced and stable throughout the quarter. This allowed us to maintain pricing integrity and lower the volume of promotional discounts offered.

Looking at customer cohort behavior, the positive trends we saw earlier in 2020 continued through the fourth quarter. Engagement levels remain high and basket size and reorder trends remain favorable, which led to a 12% increase in Q4 average spend per new customer versus the Q4 2019 cohort. Closing out the fourth-quarter top-line discussion, Autoship net sales represented 68.2% of total net sales and net sales per active customer, or NSPAC, increased to $372. This represented sequential growth of $9 or 2.5% and year-over-year growth of $12 or 3.3%.

NSPAC growth accelerated this quarter as the mechanics of the NSPAC calculation began to reflect the positive revenue impact of the millions of customers who joined the platform in 2020. As is our usual reminder, net sales per active customer reflects trailing four-quarter net sales divided by the number of active customers at the end of the quarter. It's also worth noting that we no longer need to adjust our year-over-year NSPAC comparisons for the extra week in 2018 as Q4 2018 has now aged out of the comp period. Moving on to the financials.

Fourth-quarter gross margin was 27.1%, a year-over-year increase of 300 basis points and a high watermark for the company to date. For the full year, gross margin came in at 25.5%, up 190 basis points versus 2019, continuing to our drive toward incremental annual gross margin improvement. As Sumit mentioned, approximately half of the 300-basis-point improvement in gross margin came from sustainable, structural drivers like the improved mix into higher-margin verticals like hardgoods, proprietary brands, and healthcare, as well as increased scale benefits. The remainder came from pricing stability and the more restrained promotional environment.

Turning now to operating expenses. Fourth-quarter operating expenses, which include SG&A and advertising and marketing, were $532.6 million or 26.1% of net sales, scaling 250 basis points year over year. For the full year, operating expenses were $1.91 billion or 26.7% of net sales, scaling 210 basis points versus full-year 2019. SG&A, which includes all fulfillment, customer service, credit card processing fees, corporate G&A, corporate payroll, and share-based compensation totaled $382.5 million in the fourth quarter or 18.7% of net sales, a 230-basis-points year-over-year improvement.

SG&A expenses in the quarter include a $15.9 million benefit from the release of a non-income tax reserve and approximately $13 million of COVID-related expenses. Excluding these two items, SG&A as a percentage of net sales was 18.9%, a 210-basis-point improvement year over year. For the full year, SG&A was $1.40 billion or 19.6% of net sales and scaled 40 basis points year over year. Excluding the $15.9 million non-income tax benefit in the fourth quarter and approximately $42 million of COVID-related expenses incurred throughout the year, SG&A scaled 80 basis points year over year.

Fourth-quarter advertising and marketing was $150.1 million or 7.3% of net sales, scaling 20 basis points year over year. As we discussed last quarter, the elevated organic acquisition rates we saw in the first half of 2020 began normalizing in the third quarter, and that trend carried through to the fourth quarter. As expected, we also saw channel input cost recover from the lower rates we saw in the first half of the year. We adapted to these changes, adjusted our acquisition marketing efforts, and drove accelerated customer acquisition in the fourth quarter while still improving our year-over-year efficiency.

On a full-year basis, advertising and marketing represented 7.2% of net sales, scaling 160 basis points versus 2019. We estimate that roughly half of the marketing efficiency in 2020 was a result of the pandemic-driven boost to traffic and conversion. In Q4, we delivered our first quarter of positive net income. Net income was $21 million, and net margin was 1%, a 550-basis-points improvement year over year.

Excluding share-based compensation expense of $24 million, fourth-quarter net income was $45 million, with net margin excluding share-based compensation, improving 330 basis points to 2.2%. On a full-year basis, our 2020 net loss improved $92.5 million from $252.4 million in the prior year, and our net margin improved 390 basis points to negative 1.3%. Full-year net income, excluding share-based compensation, was $36.7 million, compared to a loss of $116.1 million last year. And net margin, excluding share-based compensation, improved 290 basis points to 0.5%.

Fourth-quarter adjusted EBITDA was $60.8 million, and adjusted EBITDA margin improved 340 basis points to 3%. For the full year, adjusted EBITDA was $85.2 million, and adjusted EBITDA margin improved 290 basis points year over year to 1.2%. Turning now to free cash flow. Fourth-quarter free cash flow was $47 million, reflecting $77.5 million in positive cash flow from operating activities and $30.5 million of capital expenditures.

The positive operating cash in Q4 was primarily a function of Q4 profitability in our favorable working capital strategy. Capital investments continue to be focused on capacity build, including cash outlays for our new automated FCs in Archival, Pennsylvania, and Kansas City and our next limited catalog, high-velocity fulfillment center. We finished the year with $563 million of cash and cash equivalents on the balance sheet and free cash flow was essentially breakeven for the year. Let me highlight two points regarding our free cash flow.

First, in 2020, we invested in higher inventory levels to protect our supply chain and to ensure that we could meet our customers' needs, especially during peak holiday season. Second, note that we have continued to execute on our strategy to reinvest excess cash flow to grow the business and improve the bottom line. This is evident by the fact that in the last two years, we consume no cash while at the same time, we more than doubled our top line, launched four fulfillment centers, and improved our adjusted EBITDA margin by 770 basis points. Our strategy remains intact, and we remain committed to execution and results in 2021.

That concludes my fourth-quarter and 2020 recap. So now, let's discuss our first-quarter and full-year 2021 outlook. In 2020, we benefited from many tailwinds, some of which we expect to continue into 2021, and some of which may not. On balance, while we believe that consumer behavior post-pandemic is still somewhat challenging to predict, we also believe that our strong value proposition, which includes expanding customer choices, provides us real intangible advantages as we execute on our mission.

To start, the positive demand trends we saw in Q4 have carried over into the new year. Customer spending on our platform remains strong and business vertical mix remains structurally sound. Additionally, the pricing and promotional environment has, thus far, remained stable and in line with our expectations. On the other hand, there are certain headwinds that we continue to navigate through the first quarter.

We expect some of these to be temporary in nature, while others are likely to remain active hotspots for us to manage throughout the year. For example, we are observing an industrywide disruption in the availability and supply of wet canned food, which is driving elevated at our stock levels and suboptimal inventory positioning across our network. Thus far, this has not had a material impact on our business, but it is an area where we intend to remain vigilant. In advertising and marketing, we intend to remain disciplined in our marketing spend while balancing external variables across advertising platforms and the normalization of market conditions in a post-pandemic world.

At the same time, we don't intend to leave any opportunities on the table and reserve the option of making investments that produce long-term customer acquisition benefits, even as they affect short-term profitability. We expect to continue scaling SG&A in 2021. The labor market continues to remain pressured, driven by strong e-commerce demand and in certain geographies, persistent competition against extended unemployment benefits. We believe that our investments in automation and productivity gains will continue to help us manage these headwinds.

Further, while we will make bold investments, like the $60 million of spending on higher wages and benefits that we outlined earlier, we continue to believe that improvements in turnover, productivity, and engagement, when combined with the efficiencies we expect to realize from the other investments that we've made in tech capabilities in machine learning will yield even larger long-term benefits. With the above perspective in mind, our 2021 guidance balances the opportunities we see with potential headwinds that may arise. We are establishing guidance as follows: first-quarter net sales of between $2.11 billion and $2.13 billion, representing year-over-year growth of 36% to 37% when adjusting for the $70 million of estimated pantry stocking benefit we identified in Q1 2020; full-year 2021 net sales of between $8.85 billion and $8.95 billion, representing year-over-year growth of 25% to 26% when adjusting for the Q1 2020 pantry stocking benefit; and finally, full-year 2021 adjusted EBITDA margin expansion of 50 to 100 basis points. As you update your models for 2021, here are a few other things to keep in mind.

You should expect to see our net active customer apps in 2021, returning to something closer to their pre-COVID levels. Reflecting the normal retention patterns we see from any given cohort from the first year into the second year, and this will be especially pronounced this year given the size of the 2020 cover. At the same time, we expect NSPAC to increase in 2021 versus 2020 as pre-2020 customer cohorts continue to mature and we capture a greater share of wallet from the 2020 cohort. And one final note.

With the PetSmart separation complete, we will bring a limited number of administrative functions like tax and insurance in-house that were previously run under a shared services agreement with PetSmart. Even with this change, the operational and financial impact of the separation is de minimis. 2020 presented us with many challenges, but it also brought about many beneficial changes in our marketplace. We were well-positioned to meet these challenges and we're flexible enough operationally to take advantage of the opportunities.

As a result, our 2020 performance was strong across the board. We added a record number of new active customers, produced strong revenue growth, and generated four quarters of positive adjusted EBITDA, all of which demonstrates the clear progress we're making on our path to profitability. Looking ahead to 2021, we will continue to benefit from the evolving marketplace and our strategic execution should enable us to generate 25% revenue growth or more and further expand our adjusted EBITDA margins. With that, I'll turn the call over to the operator.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question today will come from Nat Schindler with Bank of America.

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Yes. Hi, guys. Thank you for taking my question. Just really wanted to go a little bit more into the deceleration you're baking into guidance.

I understand it was a pretty radical year this year in how things change. But obviously, all those customers who got pets and all that new customer growth that occurred all throughout this year is going to be additive to growth for the bulk of next year at least -- well, on average, half of the year. So shouldn't the deceleration curves -- barring the 3-percentage-point hit roughly that the pantry stocking did in 1Q of last year, barring that shouldn't be a much smoother slower deceleration in the subscription model like yours?

Sumit Singh -- Chief Executive Officer

Hey, Nat. This is Sumit. I'll take that one. So our guidance has us adding $1.8 billion on top-line sales this year on top of a record year in 2020.

And I think it's important to, first of all, say that we remain confident in our ability to execute through the current environment, which, in our opinion, remains challenging. So giving guidance, to us, contains reflecting on all of the headwinds and tailwinds and appropriately balancing the risk and opportunity to be able to provide a point of view this early in the year when we understand consumer behavior and the environment to be evolving and challenging at the same time. So overall, we feel good about these numbers and our ability to execute toward them. And I think another thing needs to be said in the way that we should interpret this.

See, we believe that with this guidance of $1.8 billion incremental growth, we're going to capture more than 50% of growth that will happen in the online channels in 2021, which is a powerful statement in itself. So we'll continue to sort of evaluate this and continue to keep you updated on how we -- if we update our models internally at the right time.

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Just a quick follow-up on that. How much of the incremental growth in the online channel in 2020 do you think you captured?

Sumit Singh -- Chief Executive Officer

If you do the math the way -- we believe that online grew roughly $6 billion, $6.2 billion year over year. And this year, buy online, pickup in store, which was a popular kind of mechanism, is rolled up under online. And if you back that out, pure e-commerce, pure-play e-commerce grew roughly $4 billion. And Chewy grew 2.3% off that $4 billion, so capturing 57% of pure-play e-commerce growth.

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our next question will come from Brian Fitzgerald with Wells Fargo.

Brian Fitzgerald -- Wells

Thanks, guys. Congrats. Great quarter. The average annual increase in year 1 of the contribution profit at 60% over the past three years, could you tell us what that was in 2020 and in '19, maybe more specifically? And then any thoughts on how that might continue to trend over the next three years.

And then I got one quick follow-up.

Sumit Singh -- Chief Executive Officer

Hey, Brian. It's Sumit. I'll take it. So we haven't broken down numbers.

As you know, we don't provide contribution profit-level detail. What we are observing and why we wanted to come out and share this is because it was indicative of the results that we're observing as a result of the -- direct result of the efforts that we're putting in to drive consumer LTV and profitability in the portfolio. And so when you sort of roll these back, the answer the second part of your question on a longer-term basis, these gains across share of wallet and profitability, as we evaluate them internally, are being realized and reflect the impact of catalog expansion, improved discoverability and the incremental contributions from higher-margin verticals such as healthcare, hardgoods, and proprietary brands. As we mentioned in our remarks -- I believe we mentioned this.

We've nearly doubled our total SKU count in the last three years, including executing a sevenfold increase in higher-margin proprietary-branded SKUs. So when you look at sort of margin growth from here on out, we believe we're still sort of in early innings of what remains, really focused road map on how we plan to execute our playbook and grow margins from here on out. Less than a third or approximately a third of our total customer base is today buying a proprietary-branded product, which leaves an opportunity for two-thirds of roughly 20 million customers to be exposed to higher-margin proprietary brands. When you look at healthcare being a newer vertical, that number is far, far lesser than the one-third that I mentioned, providing us even more headroom to grow.

So as we sort of continue to play out our playbook on putting more focus on innovation around products and services and the complementarity between them, you should expect us to drive incremental gradual profit from here on out. That's how we think about that.

Brian Fitzgerald -- Wells

Great. And just kind of a related one for me is just the increase in wallet share you've seen during the pandemic. Just wondering if you could talk us through maybe how many new pet adoptions and new pet purchases might be impacting that. For example, if you have a higher mix of new pet parents, how that is influencing the wallet share, the purchases of kennels, and bedding.

Maybe said another way, within the life cycle of a pet, right, maybe an odd analogy, but the newborn gets, no holds barred, they get everything new and fresh. And then by the time they get old, and you have newborn 2 or 3 or 4, you start to recycle clothes. And just wondering if you're seeing any impact from how you think that meters through the wallet share?

Sumit Singh -- Chief Executive Officer

I think it's a great question. So for us, if you recall, a data point that we shared this around in the script, we said we've seen a 35% increase in creation of pet profiles for puppies and kittens. And a 40% increase in pet profiles for adoption. Well, I mean, that Chewy puppy, so sure, you might not recycle that credit as early as next year.

First of all, puppies grow out of crates, so you likely have to, depending upon the kind of puppy that you brought home, but let's assume hypothetically that you didn't. Well, even then, I think what makes the category attractive to us, is the fact that pet sales are mostly recurring in consumables and healthcare, and the puppy is going to grow up and eat more food and shred more toys and require greater healthcare needs. And we are here to service all of them. So any kind of impact that we're seeing right now, we do believe, ultimately, there's sustainable momentum behind this kind of profiles or this kind of data that we're capturing.

Net-net, we kind of looked at our database last week. We have over 170 million data points, across these pet profiles that are created that feed in into our recommendation and personalization services and engines and provide us a greater ability to engage customers from here on out. So the game is very much on, and we're very much focused on continuing to engage customers and gain share of wallet there.

Brian Fitzgerald -- Wells

Awesome. Thanks. Appreciate it.

Operator

Our next question will come from Steph Wissink with Jefferies.

Steph Wissink -- Jefferies -- Analyst

Thanks. Good afternoon, everyone. Congrats on a great year. Sumit, I have a question for you just on the multiyear.

If you look back at the IPO model, it looks like you're running more than two years ahead of your EBITDA target at that time. So I'm curious if you can contextualize for us how much of that is leverage related to the underlying gains of the food and supplies business? And how much of that is kind of the pull forward of some of the strategic initiatives that you listed in your script, like health and compounding and other things? And how should we think about the leverage in the model?

Sumit Singh -- Chief Executive Officer

Great question. So I would say that we are -- first of all, we're executing exactly the road map we said we would. The scale benefits provide us an ability to drive more fixed cost leverage in our investments and higher variable cost scale in our fulfillment center network, given the density of volume that we drive through that network. The shift in gross margins that you observed on top of the SG&A lever is primarily driven -- if I were to characterize the impact rate of contribution of net new verticals, I would say, 60% is driven by our work toward increasing assortment and choices across proprietary brands, healthcare, and hardgoods and roughly 40% just -- I'm just doing some loose math here, is driven by incremental scale across the totality of the business and the Autoship leverage that we get, given incremental sales that we push through the Autoship channel.

Mario, anything to add?

Mario Marte -- Chief Financial Officer

I mean, I would add to the point on Autoship. But if you look at the sales for Autoship in last year alone, about $4.9 billion, as we reported it, that's greater than the entire sales -- total net sales in the previous year. So you can see how that portion also is driving leverage. And we said how that impacts, not only our ability to better plan or inside our four walls of our warehouses but across both our incoming vendors or our OEMs, and then our logistics partners.

So it is a point of leverage in gross margin as well.

Sumit Singh -- Chief Executive Officer

The way we think about it, what's most important, what's helpful is food is a staple, so that makes up the necessity of why you would likely visit Chewy. Well, we're changing that also. But if you just stick with the legacy logic, that's what attracted you plus the proposition of high-touch, high-bar customer service. And then our ability to build a basket around that has significantly improved.

Well, now, we've actually -- with the choices that we've expanded and improved discoverability, you're not only discovering food, you're actually interacting with us via content channels and figuring out that Connect with a Vet is a service that's available to you, that you might have heard by word of mouth, and healthcare is an area that we service you effectively in. We've got a Disney collection that is exclusive to us that nobody else has. I think we're creating these sort of -- these differentiations and these advantages that we believe complement each other and ultimately go back and provide benefit to the entire basket and that that scale provides leverage to our fixed-cost infrastructure.

Steph Wissink -- Jefferies -- Analyst

That's great. Thank you very much.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our next question comes from Doug Anmuth with J.P. Morgan.

Katy Ansel -- J.P. Morgan -- Analyst

Hey, thanks. This is Katy on for Doug. So hoping you can provide an update on your Connect with a Vet initiative. What have the early learnings been about far? And how does this shape your expectations around monetization this year? And then on pharmacy, last quarter, you laid out a target for $500 million of GMV in fiscal '20.

Curious where you came in relative to your expectation and then also how you're thinking about the growth potential of pharma this year. Thanks.

Sumit Singh -- Chief Executive Officer

Hi, Katy. This is Sumit. So Connect with a Vet is -- we're pleased with the progress of Connect with a Vet. Just for the benefit of the audience, it's a telecom service -- primarily a tele-triage that we launched in Q3 that allows us to connect customers with licensed veterinarians to be able to service their needs on most commonly asked questions or health and wellness-related concerns.

We're pleased with the progress of Connect with a Vet. At this point, we're very much in learning mode. We've completed over 30,000 sessions with customers, and we're learning a ton. Our Net Promoter Score remains high, above 85%.

70% of the customers who've interacted with the service have provided a 10-on-10 rating, which we're pleased about. Very recently, we've expanded Connect with a Vet from purely a chat functionality to video capability, which we're now leaning into progressively. And we've also expanded hours of operation -- or sorry, in about two weeks, we're going to expand hours of operation from 8:00 p.m. to 11:00 p.m.

to add greater availability of the service to West Coast customers. Today, the service continues to remain available to Autoship customers for free. We do believe in monetization of the service and availability of it to our entire customer base, and I will come and share that with you closer in to the time when we're ready to do that. And then on healthcare -- or your second question was about pharmacy, yes, overall, we did achieve the numbers that we had shared with you, about the $500 million net sales for pharmacy overall.

We did hit that. And your third question was our potential or future growth on pharmacy. Yes, it's just a vertical that we continue to remain excited in, right? When you look at prescription as a vertical, we believe it's roughly $7 billion to $10 billion in market size, growing at 10% CAGR, which would be even in a pandemic year growing at 2 times the rate that food and supplies is. And we are early stages of -- or early innings in that playbook, and we remain excited about the upside potential here.

Mario Marte -- Chief Financial Officer

Hey, Katy. This is Mario. Just to add one more data point to that. You're right that we said about $500 million gross revenue, but of course, not all that flow through our financials, about $360 million did.

Katy Ansel -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Our next question will come from Oliver Wintermantel with Evercore ISI.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yeah. Thank you, guys. Mario, you just mentioned ownership and as a percent of sales, it looks like that continued to decline for the third quarter in a row. Is that just because people didn't have yet the chance to sign up for Autoship or is that the expansion of more verticals and more health goods? If you could give us a little bit more details on that, please.

Mario Marte -- Chief Financial Officer

Yeah. Hey, Oli. Yeah. So you're right.

There was a small change, but that's all within the variance that we would expect any given quarter. If you look at for the full year, it was 100 basis point difference between last year and this year. But remember, this year, we also had a record number of active customers. And as you pointed out, that is part more about timing and when we expect those customers to sign up to Autoship to discover the benefits there.

But that is certainly within range of what we'd expect.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. And a quick follow-up just on the gross margin line. You mentioned half of it was structural and sustainable, the rest was less promotions. If I look into 2021, if that structural keeps on playing out and we get back to more promotion, should we -- is it that easy that we should expect another half of that gross margin expansion expected in 2021? Or what are the other moving parts on that, please?

Mario Marte -- Chief Financial Officer

So I'll start and maybe, Sumit, if he wants to add -- something to add. But we have said that the improvement that we saw in the fourth quarter, half of it was structural. None of that is any different than 2021. When we think about the vectors that we're firing against right now, continuing to grow our hardgoods catalog, healthcare proprietary brands, expanding share of wallet, and increasing what we sell to our customers, all those things are in place.

What you may find is quarter to quarter, there may be some fluctuations in gross margin, and that's simply because we do see some activity in certain times of the year in terms of promotions and maybe some more advertising in the marketplace. But the reality is, structurally, those things, we don't expect to change.

Sumit Singh -- Chief Executive Officer

The only thing I would add is, at this time, we're not baking in any top-line or bottom-line impact related to any material disruptions in supply chain or logistics networks. So far, we're assuming recovery and we're assuming a quality of recovery that does not impede the momentum of the business. And everything that we're hearing right now seem -- that is an assumption that we're comfortable with. In some instances, we have the proper amount of inventory and the inventory might be unevenly distributed through our fulfillment network.

And while that does not result in any out-of-stock situation, it does lead to higher levels of cross-shipment or split orders that result in suboptimal shipping costs that rolls up to gross margin. So I think there is some pluses and minuses, but on the balance, we do expect customers to continue to engage and discover the higher-margin verticals that we continue to focus on and, therefore, provide gradual structural changes to gross margin.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Thanks very much and good luck.

Mario Marte -- Chief Financial Officer

Thanks, Oli.

Operator

Our next question comes from Seth Basham with Wedbush Securities.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot and good afternoon. My question is around your fulfillment expense outlook. For 2020, with some of the additional costs that you called out seems like you did deleverage your fulfillment expenses. Should we think about the outlook for 2021 and the moving pieces with additional investment in wages, etc., would you expect you out to leverage for telling expenses or not?

Mario Marte -- Chief Financial Officer

Yeah. So, Seth, this is Mario. I'll answer that. We did in the -- on the prepared remarks and the earlier discussion points, we said that we were investing the $60 million in wages and benefits.

Most of that is going to be in fulfillment and customer service. We also mentioned that we're launching two new fulfillment centers this year. And so you would expect there the same type of investments we made in the past, especially last year, because one of them is going to be a high-velocity, limited-catalog fulfillment center, just like the one we launched in Kansas City last year. And the other one is going to be a fully automated -- or an automated facility much like the one that we launched in October in Archibald, Pennsylvania.

So if your question is, do we expect those investments to be reflected in our SG&A this year? The answer is yes.

Seth Basham -- Wedbush Securities -- Analyst

Got you. Well, when we think about the composition on your margin expansion for 2021, are you expecting both gross margin and SG&A leverage?

Sumit Singh -- Chief Executive Officer

I think, Seth, we just provided guidance, and the checks and balances so far flow through the guidance that we provided for the full year. And as the quarter progresses, I think we'll keep you updated and share more information on a granular basis.

Seth Basham -- Wedbush Securities -- Analyst

Fair enough. Thank you very much.

Operator

Our next question comes from Peter Keith with Piper Sandler.

Bobby Friedner -- Piper Sandler -- Analyst

Hey, good afternoon. It's Bobby Friedner on for Peter. I wonder if you could discuss what you're seeing and how you're thinking about price inflation of pet food in 2021? And how should we think about retail pricing across the entire portfolio of products in an inflationary environment?

Mario Marte -- Chief Financial Officer

Your question is a little broad, Bobby. So I'll try to answer this as best as I understand it, and if not, then please, clarify. As we've mentioned, pricing environment has remained relatively stable, and the discounting levels are relatively muted on a seasonal basis. And that is driving some higher prices and inflation in the marketplace.

But pet is a category that we believe is resilient toward recession or inflation. And in that particular manner, we haven't really seen an impediment to demand our momentum in the business right now. We expect that to continue to be the case. And as supply chains start recovering and inventory positions become healthier, we do believe this to abate and ultimately go back to the pricing environment that we were pre-pandemic.

Bobby Friedner -- Piper Sandler -- Analyst

OK. Thank you.

Operator

Our next question comes from Lauren Schenk with Morgan Stanley.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. Thanks so much. I guess marrying a few of the previous questions. When we look at your guidance for the 50 to 100 basis points of margin improvement versus the revenue guidance, I think it implies a flow-through rate of around 6%, understanding the $60 million in wages, which brings you closer to 9.5%.

But can you just help us think about if there's any other sort of one-time investments, maybe the second automated DC that is holding back flow-through or potentially offsetting some of the COVID costs that I would have thought would have sort of benefited flow-through this year? And then as a follow-up, maybe this is a piece of it, but we're hearing from a variety of different retailers about shipping delays, freight cost increases. Anything that you're seeing there on sort of a like-for-like basis heading into 2021? Thanks.

Mario Marte -- Chief Financial Officer

OK. Lauren, this is Mario. I'll take the first part. So when you think about the guidance we provided, there are several factors that go into it.

And obviously, we're providing the guidance based on the balance of risk and opportunities we see for the year. So if you think about the revenue, we mentioned we have positive demand trends that carry into the first quarter. Pricing promotions remain stable, which are going to be the pluses to the guidance range. On the other hand, the customer behavior itself post-pandemic is still evolving.

And there are some industrywide supply chain challenges for certain products. So that's how we consider the headwinds. So I'll give you the plus and minus on that to the -- on the revenue guidance range. And then to the adjusted EBITDA portion of it, we called out a few factors that we know this year or that we expect this year to be in a certain way, things like marketing, our investments there, the launch of the automated DC that you mentioned, and then the incremental $16 million or so in wages and benefits for our team members.

And it is those factors that, depending how they materialize, it's going to determine exactly where we end up in that guidance range, and then what is the actual flow through to EBITDA? Lauren, sorry, one second here. So as we've said before, look, we operate the business over the long term. So we, this year, may choose to make some short-term investments, including marketing and additional capacity. That may impact profitability in the short term but produce benefits over the long term.

So that's all in the guidance range we provided.

Sumit Singh -- Chief Executive Officer

Well, I think advertising and marketing is an interesting one in 2021, and it's hard to predict sitting so far up in the year on how this line is actually going to play out. So it's helpful to sort of extract ourselves from the current and look at it as a 30,000-foot view. First of all, we believe 6% to 7% spend of net sales in advertising and marketing to be the right range for a business like this. And the past couple of years, specifically the last three years, we've scaled marketing expense from 11% of revenue in 2018 to this past -- we were 8.8% in 2019 and then 2020 was 7.2%, 7.3%.

The 160-basis-point improvement, as we mentioned in the script, we believe half of that was driven by organic pandemic-driven efficiency, and so that would have put the scaling at right about 8% of marketing. And so I think starting with kind of current inputs on how we scale marketing, how we understand evolving trends, how do advertising platforms evolve and the ambiguity around that plus any opportunity that we find to be able to invest in marketing and drive scale, it's a tough area to talk to right now. So I think as we play the quarters out, we'll likely keep you more updated on our yearly thinking here.

Mario Marte -- Chief Financial Officer

And let me just add one more item because I want to make sure that it's clear how we think about the EBITDA for the year. The guidance we provided would have us adding over $100 million of EBITDA to the bottom line even while we grow $1.8 billion, both at midpoint of the guidance. So this is a pretty significant increase, both top line, and bottom line.

Sumit Singh -- Chief Executive Officer

And then your second question was about shipping. The variability and peakiness in demand and forecasting in a business is punitive than planning a supply chain or transportation network. And that is where we believe -- we're proud of the teams for jointly planning our forecasts and coming through with a high degree of forecast accuracy, of course, supported by the fact that 70% of our sales -- roughly 70% goes through the Autoship model. And so in some way, we provide a predictable and stable baseload forecast to our suppliers and transportation carrier partners that then enables them to optimize their micro- and macro-level asset utilization.

And that, combined with the strategic nature of our partnerships, I mean, it's shielded us from any material changes in rate structure during the holiday season or present fleet.

Lauren Schenk -- Morgan Stanley -- Analyst

Very helpful. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Sumit Singh for any closing remarks.

Sumit Singh -- Chief Executive Officer

Thank you very much for the questions, everybody. Thank you.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Robert LaFleur -- President of Investor Relations

Sumit Singh -- Chief Executive Officer

Mario Marte -- Chief Financial Officer

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Brian Fitzgerald -- Wells

Steph Wissink -- Jefferies -- Analyst

Katy Ansel -- J.P. Morgan -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Bobby Friedner -- Piper Sandler -- Analyst

Lauren Schenk -- Morgan Stanley -- Analyst

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