Chewy (CHWY) Q1 2023 Earnings Call Transcript

Chewy (CHWY -2.79%)
Q1 2023 Earnings Call
May 31, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. Thank you for attending today's Chewy Q1 fiscal 2023 earnings call. My name is Hannah, and I will be your moderator for today's call. [Operator instructions] I would now like to pass the conference over to our host, Jen Hsu, VP, head of investor relations.

You may go ahead.

Jen Hsu -- Vice President, Head of Investor Relations

Thank you for joining us on the call today to discuss our first quarter 2023 results. Joining me are Chewy's CEO, Sumit Singh; and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC earlier today, have been posted to the investor relations section of our website, investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, strategies and investments, industry trends, and our ability to successfully respond to business risks.

Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in the section titled Risk Factors in our annual report on Form 10-K and other subsequent quarterly reports, 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.

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 today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the first quarter of 2023 and all comparisons are accordingly against the first quarter of 2022.

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, Jen, and thank you all for joining us on the call today. Before we begin, I would like to thank Bob LaFleur, who, after serving as our head of investor relations for the past three years, has decided to move on to his next chapter after Chewy. We are all grateful to Bob for his years of service and for building out Chewy's IR function following our IPO. At the same time, today, I'd like to announce that Jen Hsu, our head of corporate development and M&A, has now expanded her responsibilities to include our investor relations team.

Before joining Chewy, Jen spent 12 years in technology-focused investment banking, and that background will continue to serve her well in her expanded role. Welcome, Jen. Now, let's review our first quarter results. Throughout Q1, customers remained engaged with our platform and shopping trends remained strong.

Chewy's superior value proposition, along with our team's focus and high-quality execution, did the rest. As a result, in Q1, we reported $2.78 billion in net sales, an approximately 15% year-over-year increase, and a 4% adjusted EBITDA margin. Our active customer base steadied and net sales per active customer, or NSPAC, grew 15% to exceed $500. Consistent NSPAC growth is driven by strong and ongoing customer engagement in programs like Autoship and expansion in cross-category purchases.

Autoship customer sales represented nearly 75% of total net sales in the first quarter. Our Autoship subscription service is a powerful tool for us, driving recurring and predictable revenue and long-term customer loyalty. Net sales resulted from strength in categories such as consumables, premium, and healthcare. Our customers continued to show durability and product loyalty in these nondiscretionary categories, with no discernible trade-down behavior, all of which translated to strength in average order size or AOV.

A healthy start to the flea and tick season further supported performance in our healthcare business. Moving to profitability. Gross margin of 28.4% exceeded expectations and were buoyed by lower-than-anticipated promotional activity, overall strength in AOV, and better-than-expected leverage at the freight and packaging level. Below the gross margin line, adjusted EBITDA margin expanded to a record 4% for the quarter.

Mario will provide more detail on our financial performance momentarily. And before he does so, let me take some time to walk you through our growth investments and innovation. On our last earnings call, we previewed the team's work to launch our first international market. Today, I am excited to announce that we expect to bring Chewy's superior value proposition, including our personalized and outstanding customer experience, to Canadian pet parents in Q3 of this year.

Let me elaborate on a few key concepts: why now, why we believe we can win in Canada, and how our model will allow us to grow sustainably and profitably in this market. International expansion has long been a part of our strategic road map, and there are several reasons that make now the right time for us to embark on this journey. First, we have strengthened our fundamentals over the past few years, both operationally and financially, and have put our U.S. business on a steady trajectory of growth and profitability.

Additionally, having undergone a multiyear transition of our tech stack into the cloud, we can now leverage our platform to be reliably deployed in Canada without meaningful incremental investment. As we assessed which geography would be most suitable for our expansion plans, we honed in on Canada's large and growing market, where we see a path to achieving market share and profitability akin to our U.S. business. Canada has a healthy and increasing e-commerce penetration, where we can offer a differentiated value proposition relative to existing players in the market and build the same level of trust with Canadian pet parents that those in the U.S.

have come to associate with the Chewy brand. Our initial launch will focus on the Greater Toronto market, which represents the largest metropolitan area in Canada, from which we plan to take a gradual and responsible approach to expanding our footprint. Our service delivery model will leverage our assets to create operational efficiency and attractive economics while ensuring a high-bar customer experience. Specifically, we intend to support our Canada strategy with a scaled local third-party fulfillment and logistics partner.

Our U.S. supply chain affords us an additional asset, and we will leverage our U.S. network in situations where it is strategically or economically advantaged to do so. Taken together, this approach allows us to launch in Canada with a focus on optimal customer experience and without any material commitment to capex spend until the success and scale of the business supports an investment in this area.

We do not anticipate this market requiring material capex investment through at least 2024. More broadly, on a companywide level, we do not expect our investments in Canada to deviate us from our projected long-term profitability, cost, or capex targets. We look forward to sharing our progress over the quarters to come. Moving on from international and back to business stateside, I am pleased to announce that we launched our fourth automated fulfillment center, this one in Nashville, Tennessee.

Our growing network of automated FCs, accompanied by our supply chain transformation, which I have discussed in previous earnings calls, are improving margin efficiency and, we believe, will contribute to the scaling of our long-term SG&A target. Elsewhere, in Chewy Health, we are excited to announce the official launch of Lemonade as part of the CarePlus suite of wellness and insurance offerings. With this launch, CarePlus plans are now available across a wide spectrum of coverage options and price points from two best-in-class providers, Lemonade and Trupanion, allowing us to meet the needs of a broader range of pet parents. We expect these plans to be available nationwide to the vast majority of our customers by next quarter.

As we drive broader awareness and education around our insurance product offering, we continue to see a compelling opportunity to expand TAM in this underpenetrated and highly profitable category. In closing, I am proud of our execution in the quarter as we entered the new fiscal year. With the base business performing robustly and with several new innovations in nascent stages, I remain incredibly encouraged by Chewy's prospects to deliver long-term growth and profitability and fuel positive and meaningful shareholder return. With that, I will turn the call over to Mario.

Mario Marte -- Chief Financial Officer

Thank you, Sumit, and hello, everyone. I am happy to share results from our record-setting quarter for Chewy. Net sales increased 14.7%, or $356.3 million, to $2.78 billion. Nondiscretionary, consumables, and healthcare categories continue to support our growth and collectively represented over 84% of first quarter net sales.

Autoship customer sales were $2.08 billion, up 18.6%, exceeding overall net sales growth by almost 400 basis points. Autoship customer sales have grown to represent 74.7% of total net sales. Our primary measure of customer engagement, NSPAC, grew 14.8% year over year to $512, driven primarily by our large customer base that spends more with us over time, growing Autoship customer sales, and increasing levels of cross-category purchases by our customers. Both NSPAC and Autoship customer sales reached new record highs for the company.

We ended the first quarter with 20.4 million active customers, reflecting modest net active customer growth relative to Q4 2022. Gross adds has continued to run ahead of pre-pandemic levels, and we are seeing the gradual waning of the attrition headwinds related to our outsized pandemic cohorts. As we move down the P&L, please note that my discussion of financials, where applicable, refers to metrics excluding share-based compensation expense and related taxes, as well as certain other adjustments, where relevant. The same applies to my discussion of guidance and financial outlook.

Gross margin reached 28.4% in Q1, expanding 90 basis points year over year. Gross margin exceeded expectations and, as Sumit noted in his remarks, were buoyed by lower-than-anticipated promotional activity, overall strength in average order size, and better-than-expected leverage in freight and packaging. Continuing on to opex, SG&A, excluding share-based compensation and related taxes, totaled $529.9 million, or 19% of net sales, improving 60 basis points compared to the first quarter of 2022. The main drivers of this improvement included operating leverage from higher average order size, incremental efficiencies in fulfillment costs, our team's operating discipline, and to a smaller degree, favorability in the timing of spend to support the initiatives we announced on our last call.

Q1 advertising and marketing expense was $183.7 million, or 6.6% of net sales, in line with our expectation of 6% to 7% of net sales. First quarter adjusted net income was $87.2 million, a year-over-year increase of $41.6 million. First quarter adjusted EBITDA increased $49.7 million to $110.2 million and adjusted EBITDA margin expanded 150 basis points to 4%, a result of gross margin expansion and SG&A leverage. First quarter free cash flow was $126.8 million, reflecting $148.4 million in cash flow from operating activities and $21.6 million in capital expenditures.

Capital expenditures were primarily comprised of investments in our new automated fulfillment center and ongoing technology projects. Capex in the first quarter came in lower than our historical averages, but we expect overall 2023 capex to remain in the range of 1.5% to 2% of net sales. We finished Q1 with $803.2 million in cash and cash equivalents and marketable securities, nearly $200 million higher than the balance at this time last year. At the end of Q1, between cash on hand, marketable securities, and availability in our ABL, our liquidity stood at $1.6 billion.

That concludes my first quarter recap. So, now, let me cover our second quarter and updated full year 2023 guidance. Our guidance reflects a balanced view that incorporates a strength of our business model and customer engagement, along with the latest views on the evolving economic outlook. We expect second quarter net sales to be between $2.75 billion and $2.77 billion, representing year-over-year growth of approximately 13% to 14%.

We are raising our full year 2023 net sales outlook to be between $11.15 billion and $11.35 billion, representing growth of approximately 10% to 12%. We are also raising our full year 2023 adjusted EBITDA margin to approximately 3%. As usual, let me provide you some further thoughts as you update your models for the rest of the year. As we have shared before, our gross and adjusted EBITDA margins may fluctuate slightly from quarter to quarter, driven by several factors, including the timing of investments, changes to vendor contracts, and other accruals or releases as part of the normal course of business.

For example, in Q2, as we begin operations at our automated fulfillment center in Nashville and ramp other initiatives, including the international launch, we will incur some temporary and incremental SG&A expense. Finally, you should expect our free cash flow for full year 2023 to increase alongside our expanded adjusted EBITDA margin guidance. Before we open the call to questions, I'd like to recap what our latest financial results show, and that is that Chewy is built for the long term. Our operating philosophy remains intact, and our team is highly committed to driving sustainable profitable growth.

With that, I'll turn the call over to the operator for questions. Operator.

Questions & Answers:

Operator

Certainly. [Operator instructions] The first question is from the line of Mark Mahaney with Evercore. You may proceed.

Mark Mahaney -- Evercore ISI -- Analyst

OK. Thanks. Just the sustainability of the gross margin trends, they've been kind of grinding higher now for quite some time. And I realized that there's seasonal fluctuations to it.

But just talk through why we shouldn't expect kind of sustainably higher gross margins going forward. And then just on the revenue outlook for the balance of the year, you had pretty solid results this quarter. For some reason, your guidance implies kind of a decelerating growth rate, not dramatically, but somewhat decelerating through the back half of the year. I would have thought that as -- we would have thought as you've kind of worked through all of that COVID cohort digestion that, you know, you'd be able to kind of sustain growth rates at these levels or higher.

So, just are there any one-time-ish factors or comps that we should know for the balance of the year? Thank you.

Mario Marte -- Chief Financial Officer

Hey, Mark. It's Mario. I'll start and Sumit may add something if I miss anything here. So, to your first part of the question, the sustainability of the gross margin trends, you know, I'll start off with we had a good strong first quarter.

The year started on a high note. We were helped in the quarter by a leverage in the freight and packaging line because of the basket size. It exceeded our expectations. We also had a lower-than-anticipated promotional activity in the quarter.

We may or may not get that into the second quarter and the rest of the year. And historically, we have seen fluctuations between quarters. So, that's not would be -- that would not be a new change in the pattern here. You know, when I look at the rest of the year in terms of your second question in terms of sales, I would say two things.

One is, again, very, very good start to the first quarter. You know, Q2 guidance would tell you another strong quarter is ahead of us, mid-teens, more than $300 million on an absolute dollar basis year-over-year growth. And that's at the midpoint of the guidance we provided. It's also more than any quarter in 2022 if you look back at what we added last year.

So, we're bullish about where we're heading in the second quarter. That said, we we do see historically some seasonality in our hard goods sales. There's a small pullback between first and second quarter. You can see that in our reported financials.

And as we call that, we also had a strong flea and ticks -- tick season in the first quarter. So, take that into account when you think about the second quarter. Now, what makes us bullish about the second quarter and the rest of the year is the fact that over 80% of our sales are in the categories that we talked about. They are nondiscretionary in nature.

They are consumables. They're healthcare and the like. And that's also helped by the fact that we have roughly 75% of our sales are to Autoship customers. So, these are good indicators for us and makes us bullish about the rest of the year.

Now, this was a very long answer to your question, but when we look at the second half of the year, the implied guidance is still to add about $0.5 billion to the top line in the second half of the year. So, it's a pretty big sizable growth no matter how we look at it. And right now, our focus is making sure that we execute on the second quarter and that we're well positioned, as a company, to play out through the rest of the year. Sumit, anything you want to add there?

Sumit Singh -- Chief Executive Officer

No, Mark, the only thing I would add is, you know, the first half, if you look at the dynamics between -- year-over-year dynamic between '23 over '22, you know, the first half, the composition of the growth, you know, when you looked at '22 was a combination of kind of equal weighting between price and volume. And, you know, what the second half guidance kind of implies is, you know, structural unit growth being overweighted, you know, relative to price. So, the composition of the growth is more structural in nature, you know, as we get out of the first half into the second half. So, that's kind of baked in.

And then remember, we're not baking in any material reacceleration of the hard goods business, you know, which has stronger indication as we've executed Q1 as we move through the rest of the year. You know, what we like about the current portfolio is the strong engagement. Autoship sales continue to be strong. NSPAC continues to be strong.

And so, we're baking in the checks and balances and flowing through. We'll get one more chance to update you, of course, as we play through Q2 and we're standing in the middle of the year.

Mark Mahaney -- Evercore ISI -- Analyst

Thank you, Sumit. Thank you, Mario.

Mario Marte -- Chief Financial Officer

Thanks, Mark.

Operator

Thank you, Mr. Mahaney. The next question is from Doug Anmuth with J.P. Morgan.

You may proceed.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thanks so much. I wanted to ask just how are you thinking about the timing for return to active customer growth. What needs to happen there just from a macro or attrition or acquisition perspective? And then what gives you the confidence in long-term active customer growth going forward? Thanks.

Sumit Singh -- Chief Executive Officer

Hey, Doug. This is Sumit. I'll start. So, a couple of trends are encouraging to us and are worth taking note of.

One, we delivered sequential growth, even though modest, on the active customer line. Number two, our gross adds continue to trend higher and where, you know, the softness in any gross add, you know, metric is all in the hard goods categories and much less so in the consumables and health categories. So, that's another data point. A third data point is we are observing the gradual waning of the attrition of the cohorts.

And so, overall, the net impact of the above two statements is that we have a steadying customer base, no longer on the active kind of decline trajectory that we were through kind of 2022. And so, you know, the pivot point that we're setting at relative to the strong execution that our marketing team and the rest of the Chewy value proposition, the in-stock, the pricing, the delivery, convenience, all being sharper from a year-over-year point of view, we're just -- we're bullish in our ability to go to market much more so in the second half of the year as we've, you know, shared that same perspective or shared on -- in the last earnings call. And we haven't come off of that. So, the large active -- large kind of base of customers that still remains in front of us, plus the value proposition that continues to strengthen, is what gives us confidence, alongside the steadying customer base that we observed as we've played through Q1.

Anything to add, Mario?

Mario Marte -- Chief Financial Officer

You got it. Thanks.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

OK. Thank you.

Operator

Thank you, Mr. Anmuth. The next question is from the line of Anna Andreeva with Needham. You may proceed.

Anna Andreeva -- Needham and Company -- Analyst

Great. Thank you so much. Good afternoon, guys. Two questions from us.

Mario, just to follow up on the guide, you mentioned some incremental investments in the second quarter as you ramp international. Just any color on how we should be thinking about the expense of those? And secondly, good to see hard goods seeing some improvement sequentially and you are lapping easier compares now, but can you talk about what drove that and are you expecting to see continued stabilization in the category as we go through the year?

Mario Marte -- Chief Financial Officer

Hi, Anna. It's good to hear from you. So, let me start off with the first question, which is about the investments that we talked about. So, we have said 50 basis points to 75 basis points in SG&A and marketing, and that's across all the growth investments for this year.

The largest component, we do expect that to be our Canada launch. We're still going to hold to that view of 50 basis points to 75 basis points for the full year. Now, you saw that in the first quarter that that investment was a little smaller than that. It's about 25 basis points in the first quarter.

So -- and so that means that the timing of -- throughout the year is going to change. We're going to see that more pronounced in the second quarter. Now, we are looking to self-fund. We have found ways to self-fund some of that investment, and that's what allows us to now grow our -- raise our EBITDA margin guidance for the full year, as you heard us say, to 3%.

We had originally said somewhere between 25 basis points and 50 basis points lower than that, about 2.75% to 2.5%. So, we are now looking to raise that or have raised it to 3%. Specifically to the second quarter, I'll tell you, the international investment is one of the things that you'll see us flow through in the quarter. But the other one is something as simple as the fact that we're -- we just launched our fourth automated fulfillment center.

This one in Nashville. And every time we launch a fulfillment center, we see some small deleverage in SG&A in the quarter that we launched it and the following quarter. And then it -- obviously, we've talked about the benefits it provides over the long term. So, that's what you would expect to happen, again, in the second quarter.

On your question on hard goods and when do we expect that to improve? Let me make sure that I follow your question correctly.

Sumit Singh -- Chief Executive Officer

I'll take it. Hi, Anna. This is Sumit. So, the improvement that we saw in Q1 is primarily a result of comping and lapping the years, particularly '22 over '21, and the effect in '23 here.

And so, that's that. You know, we are not assuming any material reacceleration, even though we are seeing trends starting to stabilize in what you would call replenishable hard good categories, where hard goods is tied strictly to core pet household formation trends, for example, pet adoption or new pet in household, specifically to categories such as crates, etc. Those trends aren't yet improving sequentially or on a year-over-year basis. That would be the right type of color to provide.

Anna Andreeva -- Needham and Company -- Analyst

OK. Terrific. Thanks so much, guys.

Mario Marte -- Chief Financial Officer

Sure.

Operator

Thank you, Ms. Andreeva. The next question is from the line of Rupesh Parikh with Oppenheimer. You may proceed.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Good afternoon. Thanks for taking my question. I just want to go back to your Canada expansion. So, as you look at the expansion to Canada, just curious how you think about the recognition of the Chewy brand in Canada at this point and then how you compare the competitive landscape in Canada to what you experience right now in the U.S.?

Sumit Singh -- Chief Executive Officer

Sure. Hey, Rupesh. This is Sumit. So, we've been doing some extensive work, as you would expect us to, both in terms of learning the market, the dynamics, and particularly customer behavior and shopping trends per se.

So, a few things that are noteworthy to us. One, you know, it's encouraging for us to note that we're not starting at ground zero in Canada, even though we're not present in Canada. Our market awareness broadly sits in the mid-20s. And even though that's lower than obviously what we enjoy here in the United States, it's worth noting that it's not zero.

You know, that's one. Number two, you know, when we compare the value proposition of the Chewy brand against what the consumer really wants and desires, which is a propensity toward value or propensity toward convenience, and then in Canada, much more so in the United States, a heavy lean in toward service orientation, you know, and compare that against the proposition that Chewy brings to market, we are tremendously bullish in our ability to meet the consumer where they want to be met. When you look at the landscape per se, the core inputs that drive e-commerce -- sustained e-commerce growth are present in Canada, yet without a scaled e-com provider and a high-quality e-com provider like ours being present in Canada. So, when you combine these inputs, you know, the approach that we're taking, in our opinion, is well -- is insight-driven, and to the extent that our execution remains high quality, which we have no doubt that it will not, you know, the outputs and the outcome should follow.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Thank you. I'll pass it along.

Mario Marte -- Chief Financial Officer

Thank you.

Operator

Thank you, Mr. Parikh. The next question is from the line of Rick Patel with Raymond James. You may proceed.

Rick Patel -- Raymond James -- Analyst

Thank you. Good afternoon and congrats on the strong execution. I wanted to follow up on the Canada question and help us to understand the opportunity a little bit better. What do you consider the TAM of that market and how quickly is it growing? And it seems like you have a running start for brand awareness.

I'm just curious what your go-to-market strategy is to capture new customers in light of that.

Sumit Singh -- Chief Executive Officer

Yeah. Sure. So, the Canadian market is expected to be roughly between $12 billion and $15 billion over the next four to five years, growing at a slight premium to the United States, which is obviously an encouraging data point. When you look at e-com penetration, e-com penetration sits roughly 1,000 basis points to 1,200 basis points below the United States, which is, you know, also an encouraging trend, both from the point that you're not starting from ground zero.

As I said, the inputs are there. And at the same time, you know, the market could appreciate a scaled high-quality provider such as ourselves, who has a proven playbook from, you know, our efforts here in the United States. And so, in that way, you know, we are going to combine what the customer desires in that particular market against the strong value proposition that we bring to the market, and the results should be amplified. In terms of our customer acquisition strategy, you know, we enjoy a dynamic range of -- or dynamic array of options in the way that we pick up customers, from kind of having a full-funnel approach as we enter the market to utilizing our brand awareness, word of -- strong word of mouth advertising that we enjoy here in the United States, as well as, you know, an array of wow mechanisms that we deploy to earn customer trust by delivering surprise and delight, are all in the array of options in a way -- in the way that we will go to market.

And so, we're looking forward to it. Yeah, thanks.

Rick Patel -- Raymond James -- Analyst

Thank you very much.

Operator

Thank you, Mr. Patel. The next question is from the line of Corey Grady with Jefferies. You may proceed.

Corey Grady -- Jefferies -- Analyst

Hi. Thanks for taking my question. So, I wanted to ask about any changes in consumer behavior you've seen during the quarter. You noted in your shareholder letter that you're seeing no signs of trade-down, but I'm curious if you're seeing any other changes like consolidation or potentially consumers trading up less.

Thanks.

Sumit Singh -- Chief Executive Officer

Hey, Corey. No, we're not seeing any -- we're seeing strengthening in behavior as it comes to nondiscretionary categories, which has been super encouraging for us to see. If you notice the Autoship customer growth, our Autoship customer sales growth at 75%, it Is a combination of improved active customer base in Autoship from a year-over-year point of view, as well as improvement in NSPAC per customer, you know, subscribed to the Autoship program. So, you know -- and by the way, that improvement in NSPAC is not in a price or ASP inflation is not the major driver there, which is obviously an encouraging point to note.

So, when we look at the proposition of us, you know, being in better inventory positions, sharper on pricing, you know, improved delivery expectation and promise, combined with the same kind of personalized service that customers look for, I'd say loyalty is stronger on the platform, which is, you know, keeping ASPs and also AOVs intact. And therefore, we're seeing the high engagement that we're talking about here.

Corey Grady -- Jefferies -- Analyst

Thank you.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Mr. Grady. The next question is from the line of David Bellinger with ROTH MKM. You may proceed.

David Bellinger -- ROTH MKM -- Analyst

Hi, everyone. Thanks for the question. In terms of promotional activity, it seems like somewhat of a shift Q4 to Q1, maybe a little more intense lately, but not to the extent you were anticipating. So, can you discern whether some of your promotions are, in fact, pulling in new customers, and to what extent can you use additional promos to get your net actives moving sustainably higher again?

Sumit Singh -- Chief Executive Officer

Hey, David. This is Sumit. I'll start. Mario might add something.

So, I think comparing Q1, first of all, to Q4 is a little bit of an apples and oranges given how seasonally relevant Q4 is to elasticity and Q1 isn't as much. So, year-over-year comparison might be more accurate perspective. And from that point of view, we did see incremental promotional activity on a year-over-year basis. At the same time, we saw less-than-anticipated promo activity, which is obviously encouraging and which Mario, in his prepared remarks, said helped kind of buoy some of the gross margin strength that we saw in the quarter as well.

And so, we're not -- that's the current dynamic. And we're using promos across an array of options. Yes, some part of it drives new customers. You know, it also allows us to test for demand elasticity.

It allows us to, you know, pass value by helping customers build bigger baskets, you know, etc., etc. But we don't use promos as a repeatable CRM mechanism per se. So -- and then in terms of price, you know, you've heard us kind of say in the past, we're not price leading. You know, we prepare to make sure that we are competitively priced, sharply priced where we understand demand elasticity without really demand -- you know, allowing for demand destruction while maintaining kind of profitability to the bottom line.

Anything to add, Mario?

Mario Marte -- Chief Financial Officer

I think you covered it. Right. Thanks, David.

Operator

Thank you, Mr. Bellinger. The next question is from the line of Brian Fitzgerald with Wells Fargo. You may proceed.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks, guys. One of your larger omnichannel competitors called out some weaknesses in the consumer in the second half of Q1. It was driven by macro issues. They even cited regional banking crisis and lower tax refunds.

Did you see any of that whatsoever in the consumer demand trajectory in each quarter?

Sumit Singh -- Chief Executive Officer

No, Brian. We're not seeing that.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

And then my next follow-up would just be on the Lemonade launch. Any view on how that helps you attack the TAM there? Anything you'd highlight in terms of the dynamics of the insurance market and anything you can tell us about the existing level of awareness with your foray or your offerings in the insurance sleeve? Thanks.

Sumit Singh -- Chief Executive Officer

Yeah. Brian, we're really excited about this. As I mentioned in my prepared remarks, any time you can bring choice to consumer and, on top of that, expand price points available to a consumer, you know, it directly correlates to incremental outcome in terms of revenue. And therefore, with a vertical like insurance, we actually expect a high level of flow-through to the bottom line as well.

So, we're excited about the addition of Lemonade. You know, Lemonade is a tech-forward, you know, player that appeals to a wide array of customers. And alongside Trupanion, which is obviously a high-bar provider of insurance services, you know, we, at this point, believe that we have the full spectrum covered, both from a range of customer demographic, customer psychographic, as well as price point coverage, in a way that we're going to market. I can tell you, our quota-to-conversion ratios are improving.

Our overall, you know, traffic toward these policies is improving. And at the same time, you know, the ramp is built toward the back half of the year into 2024 given that we've just onboarded Lemonade and we're going to be ramping them up. And as the prepared remarks suggested, it's really a month from now when we kind of go to market with two scale providers. Anything to add, Mario?

Mario Marte -- Chief Financial Officer

[Inaudible]

Sumit Singh -- Chief Executive Officer

Brian, happy to take a follow-up, but that's our current point of view. We're excited about it.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

That's awesome. I just got a new Bernese Mountain dog puppy, so I'll be taking advantage of that.

Sumit Singh -- Chief Executive Officer

Appreciate it.

Mario Marte -- Chief Financial Officer

Congrats, Brian.

Sumit Singh -- Chief Executive Officer

Congrats.

Operator

Thank you, Mr. Fitzgerald. Our next question is from Steven Zaccone with Citi. You may proceed.

Steven Zaccone -- Citi -- Analyst

Great. Good afternoon. Thanks for taking my question. Sumit, I was curious for your perspective on the competitive dynamics in the pet category if the consumer spending environment weakens.

I know there's been some earlier questions here citing some peers have talked about softening trends. How do you think you're positioned if the consumer starts to pull back on spending? You know, how do you think about your competitive positioning maybe on price or maybe loyalty? Be curious to get your perspective.

Sumit Singh -- Chief Executive Officer

I think the results -- Steven, the results speak for themselves. You know, I'll lead with two data points. A, over 84% of our sales were attributed to, you know, resilient categories such as consumables and health, where we have a tremendously strong proposition of, you know, a wide assortment; B, sharp pricing. And when you look at delivery convenience, it has actually improved on a year-over-year basis.

Let me give you some data points. Our on-time delivery relative to '22 is sitting at about 150 basis points higher. Our click-to-deliver is sitting roughly 20% better at this particular point. Our in-stock positions are sitting roughly, you know, at some of the lowest levels that we've observed in the last two years.

And so, when we combine these inputs, you know, alongside, again, I've mentioned the personalized experience that we deliver, it just sets you up for -- you know, to continue to fuel the loyalty that we enjoy. And the second proof point -- I said I'll lead with two data points. The second data point is the Autoship sales. Seventy-five percent of our sales going through the Autoship program allows a predictable, repeatable base of volume that allows us to fulfill that demand in a manner that optimizes asset utilization across the company and allows us to kind of flow that revenue, you know, into the bottom line.

So, I --

Mario Marte -- Chief Financial Officer

You know, I would add, Sumit just hit on the very, very key point here that you have brand loyalty, coupled with an Autoship program that serves the customer well, coupled with pricing convenient selection that we believe are unparalleled. And you have this -- the dynamics, I would say, that if that were to happen, the competitive dynamics change, we're well positioned. And we obviously have just raised our full year guidance given everything we know. So, yes, we're well positioned.

Steven Zaccone -- Citi -- Analyst

Great. I appreciate the detail. The follow-up I had was just on gross margin. Because freight costs are coming down overall for -- from an industry perspective, would you still expect freight to be a tailwind to gross margin over the balance of the year?

Mario Marte -- Chief Financial Officer

And -- but for which part of the freight and packaging, because we have a multiyear contract with our logistics provider. So, the rate there are pretty locked in at this point. The thing that may fluctuate are things like fuel prices. Obviously, they can go up or down from where we are today, but that should be a de minimis at this point.

So, it's more things that are under our control in terms of the logistics and the supply chain transformation initiatives that we launched last year. And I think, in the last call, we said that those have paid off very well and that we have offset most, if not all, of the increases on the rate card that we incurred starting in '22.

Sumit Singh -- Chief Executive Officer

Steven, specifically, if we were to put a range on the transformation impact to left on freight and packaging, you know, I'd say we'd likely be able to pull another 50 basis points to 75 basis points out. But that will happen on a multiyear basis, right? It's not happening this year. We've -- like Mario said, we've pulled most of that out, you know, into the last kind of 15 months of execution, which helped us kind of buoy 2022 margins. And in '23, as we're heading into it, you know, some of the outside of kind of fuel variances, we feel we're running this pretty tightly.

And to the extent that supply chains improve, it helps us improve our inventory placements better, yeah, that might buoys -- buoy freight a little bit. But from an input point of view, we're fairly well set.

Steven Zaccone -- Citi -- Analyst

OK. Thanks for the detail. Best of luck.

Mario Marte -- Chief Financial Officer

Thanks, Steven.

Operator

Thank you, Mr. Zaccone. The next question is from the line of Lee Horowitz with Deutsche Bank. You may proceed.

Lee Horowitz -- Deutsche Bank -- Analyst

Great. Thanks for the time. Can you spend a little bit of time talking about the underlying pet household growth? I think, in the past, you've talked about that declining in the low single-digit range. Is this still what you're seeing in the underlying market? And are you maybe seeing any stabilization here that may give you hope that the industry -- that industry growth is perhaps on the horizon? And then can you update us on how your advertising data has been progressing? Have test customers driven compelling ROAS in the beta test? And what are the markers that you are looking for before you roll out the advertising product to a broader set of partners?

Sumit Singh -- Chief Executive Officer

Sure. So, your first question on underlying pet household growth. So, I'll share two data points with you. Pet household formation is flat.

So, to the extent that we could consider that encouraging, yes, it's at least not declining like we've mentioned in the past. Our recent read is that it's flat. And then another data point is that when you look at shelter and rescue data, between adoption and relinquishments, adoptions aren't happening and relinquishments have steadied. So, there isn't a growth in adoption.

At the same time, you know we're not seeing relinquishments increase per se. So, that's a helpful data point, which kind of signals toward, you know, the resilience over our long term for these inputs that fuel growth in pet over time. I will caveat it, as I always do, which is the source of this data isn't -- you know, there aren't one -- there's isn't one published source. We gather these data points from our relationships across 5,000 shelters and rescue communities that we work with, you know, along with our suppliers and vendors conversations, etc.

So, I just want to caveat it with that. Number two, on the advertising data, we're really encouraged by the way this is progressing. So, I'll share a little bit of what I said last time. We're in process of ramping up supply.

We have demand knocking at our doorstep. And what we are doing right now is phase-gating that demand against the supply that is available on the website. So, as we've entered -- as we've exited Q1 into Q2, we've actually kind of internally moved away from the word beta to a little bit more of a softer, you know, kind of ramp up per se because the guardrail that we're testing against is we are hyper-conscious of the impact of expanding ads inventory on pet parent user experience. And so, that's the guardrail that we're maintaining.

We feel good about our ability to expand supply as we move toward the back half of the year and then ultimately really kind of full ramp this program in 2024. I didn't quite catch the question. I think you had a ROAS question in there. And if you do, please repeat that.

If not, then I think I would rest there.

Lee Horowitz -- Deutsche Bank -- Analyst

I -- yes, the question was just sort of around the type of ROAS that you're seeing within the beta aspect.

Sumit Singh -- Chief Executive Officer

Sure.

Lee Horowitz -- Deutsche Bank -- Analyst

And I think you sort of answered the what were the markers are for [Inaudible]

Sumit Singh -- Chief Executive Officer

Sure. Sure. Sure. So, you know, a thing that we are encouraged, which is unique to Chewy proposition, again, going back to the repeat recurring purchase nature of how consumers trend their loyalty with us, is the concept of the LTV, right, which is fueled with programs like Autoship.

And so, you know, when you consider that, you would also then consider that our approach to ROAS is slightly different from the direct ROAS that the industry is used to. And therefore, we would take into account, you know, the power of loyalty and LTV ROAS, you know, as we go to market. And by the way, that's being well understood and it's well received. And when you compare the ROAS to LTV ROAS, we're actually seeing, you know, quite healthy returns above industry standard at this particular point.

So, we're encouraged by the ramp.

Lee Horowitz -- Deutsche Bank -- Analyst

Very helpful. Thank you.

Mario Marte -- Chief Financial Officer

Thanks, Lee.

Operator

Thank you, Mr. Horowitz. The next question is from the line of Dylan Carden with William Blair. You may proceed.

Dylan Carden -- William Blair and Company -- Analyst

Thank you very much. Just curious, the language that you're using with gross adds ahead of pre-pandemic levels, I guess the implication there would be that if churn normalizes, you'd be back to kind of net adds in line with kind of the 2018, 2019 period. Is that fair, without asking you to put a time frame on that?

Mario Marte -- Chief Financial Officer

Hey, Dylan. It's Mario. I'll answer that one. It's -- we are -- our gross adds are running ahead of pre-pandemic levels.

And certainly, they're even running ahead of last year this same quarter. But I'm going to reserve making a statement that we expect to return to any sort of levels until we are ready to make that statement. Let me just say that. What we have said is that our thinking hasn't changed for this year that we would expect second half growth in active customers.

Dylan Carden -- William Blair and Company -- Analyst

OK. Fair enough.

Mario Marte -- Chief Financial Officer

And obviously --

Dylan Carden -- William Blair and Company -- Analyst

And then I guess -- what's that?

Mario Marte -- Chief Financial Officer

And obviously, we're pleased that we had stability in that -- in the active customer base in the first quarter. That's -- will be a given here.

Dylan Carden -- William Blair and Company -- Analyst

Right. Right. Sure. And then the spend per customer, are you seeing that kind of return to more normalized levels? I know, in the middle of the pandemic, it kind of dipped down for certain year cohorts.

Is that normalized or is the hard goods component of that still making that a noisy metric?

Mario Marte -- Chief Financial Officer

Well, the NSPAC, as we showed it, the 512, is a new record high for the company, and the increase of about 15% or so was similar to what we saw all of last year. So, we're seeing strength there. That's obviously partly driven by the increasing prices, but it also is a volume play. So, the customers that are staying with us, the longer they stay with us, the more they spend with us.

That dynamic continues to hold through this quarter as well. Certainly, if we had more hard -- more sales in hard goods, have we seen that grow, that obviously would help with NSPAC and just overall spend per customer. But for now, we're seeing -- even without that, we're seeing an increase in NSPAC.

Dylan Carden -- William Blair and Company -- Analyst

OK. And then final one for me, I had thought kind of early on in your public history that the Autoship kind of penetration rate wasn't expected to grow too much. The 75% kind of surprised you as to where you've been able to get to. Do you think that there's more upside to that number? And are there any kind of quantifiable margin implications from adding the kind of 5 percentage points that you have over the last couple of years? Thanks.

Mario Marte -- Chief Financial Officer

Yeah. Dylan, I think the comment we may have made at that point was not that we didn't expect it to grow. As we were saying -- I think, at that point, we were around the 60% mark give or take, and we were saying, look, 60% is really good when you're selling a product that you have to ship. And if it were -- if it grows, great.

But at that level, every order in the company that flows through our warehouse was benefiting from that level of Autoship customer sales. Certainly, we're very happy that it's grown to about 75%. That's a function of a handful of things. One is the program just gets better over time.

We find ways to reduce the friction, to make the program easier on our customers. Certainly, I think you know that this program is -- doesn't cost anything. In fact, it leads to a discount for the customers who sign up for that program, and that discount is funded by our vendors, so we don't have to fund it ourselves. So, there are -- between that and the fact that we are now seeing more of our sales shift to healthcare and consumables given the relative softness in hard goods, you're seeing that grow to the 75% or so that we just printed.

So, it's a handful of factors. It's a really good thing. We think about the program as a program and how we can make it better, but we're not necessarily sort of obsessing over whether we get it to 77% or 73% or anything like that.

Sumit Singh -- Chief Executive Officer

It's a -- the symbiotic relationship here really helps. You know, it's one of the more effective mechanisms to fuel brand loyalty for our supplier brands. And, you know, obviously, their participation greatly, you know, showcases the value that both of us kind of find in it. And number two, you know, customers -- you know, I talked about the power of expanding kind of choices for customers.

If you observed over the last three or four years, you know, we've expanded the eligibility of, you know, SKUs in the particular program and have led customers, right? Our site experience continues to let customers engage in more productive manners to be able to build bigger baskets, which then they extract greater value from. So, you can kind of see the inputs that are correlated to program growth. And then you put on categories such as healthcare, which were obviously, you know, driving growth toward. It's all -- it all leads to the amplification that you're seeing here, which is why I mentioned the combination of both active customer growth in the program times the NSPAC increase that we're seeing on a year-over-year basis.

Dylan Carden -- William Blair and Company -- Analyst

Has the healthcare component been a big part of the increase in penetration?

Sumit Singh -- Chief Executive Officer

Well, it absolutely is, right? I mean, when you think about over -- we started the healthcare category four years ago and, at this point, you know, run the largest, you know, pharmacy in North America or pure-play e-com pharmacy in North America. And that's a -- it's a credible base that we are building from and serving customers who continue to enjoy, you know, the same propositions that we've talked about on this call. You know, and when you think about the proposition of a health customer, humans are bad at feeding humans medication. We forget to feed our pets.

So, when you -- if you have the option of putting, you know, that on recurring delivery, combined with an ongoing engaged program and the notification engine put behind it, etc., etc., it fuels even stronger compliance rates. And so, you know, our compliance is really healthy relative to average compliance in the industry. Again, as I said, it's a symbiotic relationship between our suppliers and us, you know, who together kind of build brand loyalty, and the customers enjoy the return in that way.

Mario Marte -- Chief Financial Officer

Let me add one more data point, I think, just to kind of complete the thought here. But over 95% of our consumables SKUs or products are Autoship eligible, 100% of our healthcare products are Autoship eligible. So, when you think about that and the fact that those components in our sales profile have grown over time as a percent of total sales, you get the lift in overall Autoship customer sales.

Dylan Carden -- William Blair and Company -- Analyst

Yeah. We appreciate the extra time, guys. Thank you.

Mario Marte -- Chief Financial Officer

Yup.

Operator

Thank you, Mr. Carden. Our next question is from the line of Trevor Young with Barclays. You may proceed.

Trevor Young -- Barclays -- Analyst

Great. Thanks. First one, just what was orders shipped growth in the quarter? I think the 10-Q mentioned that it was positive year on year, but it didn't specifically quantify. And then second one, we've had some questions from investors around some one-time supplier rebates that maybe started in 4Q and carried over into 1Q.

I'm just wondering if you could clarify if there was, in fact, some one-time rebate this quarter and how much of a lift that was. Thank you.

Mario Marte -- Chief Financial Officer

Yeah. So, I'll answer the first part of the question. We actually -- we purposely took it out of the 10-Q, Trevor, because it was causing some confusion. The way we were defining those orders, it was as a packages shipped.

And of course, as we get better at packaging -- at shipping fewer packages per order by consolidating the product into single boxes, and that's going to -- that was kind of throwing everybody off, and we had -- just created confusion. So, better to say that it -- the orders grew, overall. Certainly, unit grew. We -- you heard us say that two-thirds of the growth in the quarter came from unit growth.

But because we're getting better at sending those orders and complete in a single package, the number of packages held -- grew at a low -- slower rate, let me put it that way, than the overall sales. The second part of your question was around questions from investors on one-time supplier rebates. We did not see anything like that in the first quarter. Nothing meaningful to call out.

So, let me just say that where you tend to see something like that, it's going to be toward the end of the year. And that is as you get growth rebates and the like. But look, that's a -- that's not a -- that's not something that we're sort of assuming at this point in the year. So, nothing to call out in the first quarter.

Trevor Young -- Barclays -- Analyst

Great. Thank you.

Mario Marte -- Chief Financial Officer

Thanks, Trevor.

Operator

Thank you, Mr. Young. Our last question comes from the line of Lauren Schenk with Morgan Stanley. You may proceed.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. Thank you. Nice to see the net adds turned positive. Is your expectation that that will remain positive in the second quarter and then into the back half of the year? And just a clarifier on the customer growth expectations in the back half of the year, you're talking about a year-over-year basis that should be positive in 3Q and 4Q? And then lastly, any way to think about what the customer contribution from the Canada launch could look like in the second half of the year? Thanks.

Mario Marte -- Chief Financial Officer

Hey, Lauren. It's Mario. So, I'll start off with your first question, which is that -- I'll start with repeating your statement that you were pleased to see a positive net add in the quarter or maybe I'm putting words in your mouth. I would say that we were pleased as well, but reality is, look, this is all within the, I would like to call, the set of expectations we have internally.

Could have we went up a little bit, we could have gone down a little bit, and that would have been perfectly within the set of expectations for the first half of the year. I won't break down quarter by quarter because that's going to get us into just trouble. I'll just tell you that we are -- our thinking for the full year has not changed. While we expect the first half to be around the mean point coming into the year, and then second half to see some growth in active customers.

Let me kind of keep it to that. I think it's going to be better than trying to guide you quarter by quarter. The customer contribution we're expecting from Canada launch, what you have heard us say in this case is that Canada is -- we expect -- we're preparing now for a launch in the third quarter, and we expect it to not have a material impact on net sales, gross margin, NSPAC, or active customers. The impact they will have is on EBITDA as we make those initial investments, and we outlined what that impact is.

But nothing meaningful to call out for top line or active customers or NSPAC at this point.

Lauren Schenk -- Morgan Stanley -- Analyst

OK. Thank you.

Mario Marte -- Chief Financial Officer

Thanks, Lauren.

Operator

Thank you, Ms. Schenk. So, that concludes the question-and-answer session. I will now pass the call over to the management team for any further remarks.

Sumit Singh -- Chief Executive Officer

Thank you, team. This is Sumit. Have a great evening. Thank you for joining us.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jen Hsu -- Vice President, Head of Investor Relations

Sumit Singh -- Chief Executive Officer

Mario Marte -- Chief Financial Officer

Mark Mahaney -- Evercore ISI -- Analyst

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Anna Andreeva -- Needham and Company -- Analyst

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Rick Patel -- Raymond James -- Analyst

Corey Grady -- Jefferies -- Analyst

David Bellinger -- ROTH MKM -- Analyst

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Steven Zaccone -- Citi -- Analyst

Lee Horowitz -- Deutsche Bank -- Analyst

Dylan Carden -- William Blair and Company -- Analyst

Trevor Young -- Barclays -- Analyst

Lauren Schenk -- Morgan Stanley -- Analyst

More CHWY analysis

All earnings call transcripts