Chewy (CHWY) Q2 2023 Earnings Call Transcript

Chewy (CHWY 2.99%)
Q2 2023 Earnings Call
Aug 30, 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 second quarter FY '23 earnings call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

[Operator instructions] I would now like to pass the conference over to our host, Jen Hsu, head of investor relations. You may go ahead.

Jen Hsu -- Vice President, Investor Relations

Thank you for joining us on the call today to discuss our second quarter 2023 results. Joining me are Chewy's CEO, Sumit Singh; and CFO, Stacy Bowman. 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 second quarter of 2023, and all comparisons are accordingly against the second 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 investor relations 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 want to introduce Stacy Bowman, our chief accounting officer. As previously announced, CFO, Mario Marte retired on July 28th, and Stacy is serving as our interim CFO. While we continue the search for a permanent CFO.

She is a respected leader who has been with Chewy for more than eight years and is deeply familiar with our finance organization, systems, and processes. Welcome, Stacy. Now, let's begin. Our second quarter carried on the positive trends we saw in our Q1 results, delivering mid-teens growth exceeding guidance, as well as robust profitability.

In Q2, we reported $2.78 billion in net sales, up 14% and a 3% adjusted EBITDA margin. Consistent with our expectations, active customers were broadly flat on a sequential basis, while net sales per active customer, or NSPAC, reached $530, reflecting a 15% increase. Net sales growth was underpinned by strong participation from our customers, underscoring the ever-increasing strength of the Chewy ecosystem. This momentum was evident across many of our focus areas, including Autoship, where sales continue to grow at a faster pace than our top line, increasing their share of total net sales to 76% in the second quarter.

Autoship remains a key differentiator of Chewy's business model, enabling high visibility and predictability, driven by recurring revenue streams while engendering customer loyalty. Additionally, we are also successfully driving discovery of our Chewy health platform. For example, cross-category penetration into pharmacy now represents nearly 20% of our overall active customer base. Elsewhere across Chewy, our teams are continuously enhancing our CRM capability, improving targeting and supporting strong customer engagement.

Moving down the P&L, we delivered another quarter of robust profitability. Gross margin of 28.3% was broadly in line with expectations. As anticipated, promotional activity in the second quarter was higher than in the first quarter. However, the promotional environment on the whole remains largely rational.

Adjusted EBITDA margin came in at 3% for the quarter, benefiting from our strong gross margin trends and fulfillment cost efficiencies, offset by the impact of our exciting growth investments, including our Canada expansion, which remains on track for a Q3 launch. As we indicated during our Q1 earnings call, we continue to utilize our growing free cash flow to self-fund a meaningful portion of these growth initiatives. Additionally, our automation efforts continue to be both a driver of margin improvement to date, as well as a source of continued upside. Two of our four automated facilities are still ramping, and our fifth automated site is opening in early 2024.

Combined, we expect them to provide additional operating efficiency in the future years. Before spending time on business initiatives, let me share our perspective on consumer behavior in the pet industry and, in particular, how these trends may impact active customers and NSPAC at Chewy. Coming out of the summer months, we are sensing a shift in consumer mindset toward being more discernible and, at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice. This behavior is driven by a more fluid macro environment, including high levels of inflation, which have been passed through the industry over the past 18 months.

Our dialog with our suppliers confirms that these trends are permeating throughout the pet industry. At Chewy, we are, in many ways, insulated from these pressures, given our high-quality customer base; the mix of our consumables and healthcare businesses, which drove nearly 85% of our net sales in Q2; our powerful Autoship subscription service; best-in-class healthcare experience; and our overall promise of competitive prices, convenience, and unparalleled customer service. Our loyal customers recognize these attributes as key differentiators and continue to demonstrate robust ordering behavior, which, in turn, continues to support our strong performance. Further to this point, we see significant potential to continue growing share of wallet with our existing customers, evidenced by our strong track record of sustainable NSPAC expansion.

As you may recall, we have grown NSPAC from around $330 in the year preceding our IPO to $530 this quarter, up approximately 60% over that time. While we saw a modest benefit from price increases, efforts such as growing Chewy health ecosystem, increasing uptake of our Autoship program, and our large customer base that spends more with us over time have driven the majority of our NSPAC expansion. This underscores the sustainability of our track record, as well as the ongoing potential to outperform the pet industry and deliver strong and profitable growth. Now, while we're more insulated than some others, we are not fully exempt from the pressures currently facing the pet industry.

Pet household formation remains relatively muted. And as I mentioned above, the consumer mindset continues to be pressured. These factors taken together make the current environment a challenging period to forecast consumer behavior. Taking this into consideration, we continue to see potential for returning to net ad growth during the second half of this year.

But in light of recent trends, we are now expecting a wider range of potential outcomes. While the industrywide trends I just described make it challenging to forecast net ads, these dynamics are not specific to Chewy, and we believe we are well positioned to drive improved active customer trends as macro factors and consumer behavior patterns normalize. Now, I would like to provide an update on some of our strategic initiatives. Our upcoming expansion into the Canadian market remains on track for Q3 of this year.

Canada represents a large and fast-growing pet category. And our teams are hard at work finalizing selection, ensuring the same convenient delivery experience and high-bar service that our U.S. customers enjoy. We look forward to sharing our progress over the quarters to come.

In sponsored ads, one of our prospective margin-accretive growth vectors, we are executing against a compelling roadmap and remain on track to ramp the program throughout the second half of the year and into 2024. We remain encouraged by the opportunity ahead and will continue to update you on progress as we scale the business. Lastly, I'm excited to announce that we intend to host our first investor day later this year. Chewy has come a long way since our 2019 IPO, having nearly tripled our net sales to north of $10 billion, expanded gross margin by 800 basis points, and adjusted EBITDA margin by nearly 1,000 basis points.

Yet, we are just getting started and believe that we still have considerable run rate, with clear potential to outperform the broader pet industry and drive both strong growth, as well as significant margin expansion. We look forward to sharing a deep dive on our highly integrated pet ecosystem, unveiling our exciting roadmap ahead and recalibrating our long-term financial expectations to reflect the upside we see in the Chewy platform. In closing, I am particularly proud of our strong results and the high levels of customer engagement that we achieved in Q2. We operate in a secular growth category with demonstrated consumer resiliency.

And Q2 once again showcased the strength and durability of our platform. With that, I will turn the call over to Stacy.

Stacy Bowman -- Interim Chief Financial Officer

Thanks, Sumit. I look forward to engaging with many of you in this new role. In the second quarter, net sales grew 14.3%, or 347 million, to 2.78 billion. Nondiscretionary consumables and healthcare categories continue to meaningfully contribute to growth in the quarter, collectively representing approximately 85% of second quarter net sales.

Autoship customer sales were 2.1 billion, up 18.1%, and continue to outpace aggregate top-line growth by almost 400 basis points. Autoship customer sales now represent 75.5% of total net sales. Active customers remained broadly flat on a sequential basis and finished Q2 at 20.4 million. However, our primary measure of customer engagement, NSPAC, grew 14.7% to $530.

Notably, both NSPAC and Autoship customer sales yet again reached new record highs. 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 disclosed in our SEC filings where relevant. The same applies to my discussion of guidance and financial outlook. Gross margin reached 28.3% in Q2, which reflects a 20 basis-point expansion, broadly consistent with our expectations for the quarter.

Continuing on to opex. SG&A, excluding share-based compensation and related taxes, totaled 550.9 million or 19.8% of net sales, deleveraging 20 basis points compared to the second quarter of 2022. This temporary increase was largely driven by corporate payroll increases related to our growth initiatives, such as sponsored ads and our expansion into Canada, ahead of realizing the associated expected net sales growth. The SG&A deleveraging was partially mitigated by continued fulfillment cost efficiencies supported by our automation initiative.

Q2 advertising and marketing expense was 185.5 million or 6.7% of net sales consistent with our expectation of 6% to 7% of net sales. Second quarter adjusted net income was 63.3 million, an increase of 1.2 million. Second quarter adjusted EBITDA reached 86.9 million, up 3.8 million, implying an adjusted EBITDA margin of 3.1%. Second quarter free cash flow was 101.1 million, reflecting 158.8 million in net cash provided by operating activities and 57.6 million in capital expenditures.

Capital expenditures were primarily comprised of automated fulfillment center investments and ongoing technology projects. As a reminder, we regularly see fluctuations and capex intensity from quarter to quarter. Following below-average capex intensity in the first quarter, capex spending increased in the second quarter. Overall, we expect 2023 capital expenditures to remain in the range of 1.5% to 2% of net sales.

We finished Q2 with 905.4 million in cash and cash equivalents and marketable securities, nearly 300 million higher than the balance at this time last year, and we remain debt-free. At the end of Q2, between cash on hand, marketable securities, and availability on our ABL, our liquidity stood at 1.7 billion. That concludes my second quarter recap. So, now, let me cover our third quarter and full year 2023 guidance.

As always, our guidance reflects a balanced view that incorporates the strength of our business model and customer engagement, along with the latest views on the evolving economic outlook. We expect third quarter net sales to be between 2.74 billion and 2.76 billion, representing year-over-year growth of approximately 8% to 9%. We are reiterating our full year 2023 net sales outlook of 11.15 billion to 11.35 billion, representing growth of approximately 10% to 12% compared to full year 2022. We are also reiterating our full year 2023 adjusted EBITDA margin outlook of approximately 3%.

As you update your models, also note that we expect our free cash flow for full year 2023 to be approximately 2.5 times the free cash flow we generated in full year 2022. Before we open the call to questions, I'd like to reiterate that our strong second quarter earnings reflect the resilience of our operating model in an evolving macro environment. We believe that Chewy is exceptionally well equipped to navigate the road ahead and deliver strong performance as our execution is grounded in our operating philosophy of driving sustainable profitable growth. And with that, I'll turn the call over to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from the line of Doug Anmuth with JPMorgan. You may proceed.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thanks so much for taking the questions. Sumit, if you could talk more about the wider range of outcomes for active customers in the back half. Curious how much is hard goods-driven acquisition a factor here even though it's not a big piece of your business. And if my math is right, the 4Q guidance range is around 5% to 12%, which feels pretty wide.

Just hoping you can help us understand what's happening at both of those extremes. Thanks.

Sumit Singh -- Chief Executive Officer

OK, just to clarify, the guidance range you're talking about is revenue guidance range or somehow customer guidance range?

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Revenue -- yeah, the implied revenue guidance range for 4Q.

Sumit Singh -- Chief Executive Officer

OK, that's not -- so just to address that head on, that's not how wide we're thinking. We're estimating the range of outcomes on net ads to be a bit wider. We clearly communicated that we expect growth in the back half of the year. And while that's certainly possible, you know, we're sort of modeling a couple of different types of scenarios.

But on the back of that, I want to reiterate the guidance that we provided, which we actually feel pretty good about, given the strength that we're seeing from ordering customers and the engagement, you know, from those customers on our platform. Now, let me go back and kind of give you the color on why we're projecting a wider outcome or wider range on the net ads or active ads kind of conversation that we've been having the last couple of quarters. So, essentially, what's happening is -- I'll provide a short version, happy to dive into the details here. So, consistent with what we've previously communicated, large COVID cohorts that were headwind to net ads during the first half of the year, we continue to expect this impact to diminish in the second half now that we've reached the two-year mark for a majority of these cohorts.

At the same time, you know, coming out of Q2, what we've seen is a slightly more discernible customer. And it really started in July for us, much more than it did in May and June. And so, we just haven't had enough time for this to play through. We're projecting what we're seeing right now forward.

And what it is, is that for the more recently acquired or newer cohorts of customers whose behavior is proving difficult to forecast, given kind of the pressures that they're under, given the high inflation, we just have to -- we believe we have to work harder. We will have to work harder to earn their trust simply because they are more distracted by the current macro pressure, and they haven't yet had the cycles to experience the Chewy magic. So, you know -- so we know that we have to execute even more sharply to deliver value to the cohorts of customers that are seeking value in the near term such that we are winning with them as much as we win with the customers that are already loyal to Chewy. So, it's really kind of a tale of two cities.

It's -- you know the loyal cohorts stay loyal, and they're consolidating their share of wallet with us, so that is driving, you know, the NSPAC expansion. And then, this recent kind of July trend that we're slightly seeing projected into August so far is what's causing us to say, "Hey, you know, maybe we should widen the aperture here and play through a range of sensitivities." Yeah. But on the back half, we're pretty confident about delivering the -- or holding our guidance, which, by the way, is going to be a share-winning position in the back half of the year.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

And if I could just follow up on NSPAC, can you just help us parse out what's happening kind of 2Q and 3Q between inflation and like-for-like pricing?

Sumit Singh -- Chief Executive Officer

Yeah, sure. So, pricing is going to impact in two different ways. And Stacy can also provide some color if she wants to here. But essentially, on pricing, what you're going to see is the back half, the cost increases that came through in 2H of '22, right, we benefited from them in the first half of '23.

So, going into the back half, our growth is driven as a combination. The revenue composition is weighted, volume and price, and not overweighted toward price. On NSPAC, as we decompose our NSPAC -- or deconstruct our NSPAC, what we can confidently state is that inflation over the past years has provided a modest benefit. So, greater than kind of two-thirds to north of 70% of the benefit that we're seeing in the NSPAC growth is organically cohort development plus ownership development plus health development, etc., etc.

So, it's all accretive. And obviously, Q4, we expect, you know, a little more transactional given kind of the holiday season and the ASP compressions that generally take place in a time like that. So, it's a bit more transactional than Q3.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Great. Thank you, Sumit.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Mr. Anmuth. Our next question is from Eric Sheridan with Goldman Sachs. You may proceed.

Eric Sheridan -- Goldman Sachs -- Analyst

Thank you so much for taking the question. Maybe -- I want to come back to the ads business potential, both at the end of this year and into the next fiscal year. Maybe you can refresh us on some of the key learnings you've had from debating and working with partners on the ads business rollout. And how should we be thinking about the elements of ad coverage or advertiser response or things that you're trying to line up ahead of that morewider launch later this year? Thanks so much.

Sumit Singh -- Chief Executive Officer

Sure, Eric. So, this is essentially a tale of two cities also. The demand on the platform is far exceeding the supply that we have right now opened up to our suppliers, which is obviously a point that proves kind of the conviction behind the product, as well as the quality of the product that the team is launching. You know, the guardrail on opening up supply is limited to make sure that we're making sure that the organic experience that customers have come to enjoy doesn't get overrun by sort of the -- we just want to make sure we're very thoughtful in opening up that supply.

So, the plan has always been to ramp this up into edge, and we're on track for that. In fact, the original forecast that we had kind of coming into perspective, you know, as the program scales, we were sort of thinking of this as 1%, 1.5% of opportunity that we are now kind of, you know, squarely thinking in the 1% to 3% range and to widen our aperture as the program kind of takes hold per se. So, the response rate is there. The teams are appropriately focused.

Customer experience forms the right type of bar to make sure that our quality and go-to-market execution is high. Otherwise, our vendors are seeing -- or at least the participating suppliers are seeing are high, particularly as you deal with, you know, the subscription nature of our business. And therefore, the ROI is appropriately converted into an LTV basis rather than a one-time transaction that most ad platforms kind of run in the market per se, which, you know, we've always been aware of and that we believe is the strength of the Chewy platform. And we'll allow our suppliers to kind of build their brands in an even more compelling manner.

Eric Sheridan -- Goldman Sachs -- Analyst

Great. Thanks for the color.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Mr. Sheridan. Our next question is from the line of Steven Zaccone with Citi. You may proceed.

Steve Zaccone -- Citi -- Analyst

Great. Good afternoon. Thanks for taking my question. Stacy, congrats on the new role.

Sumit, I was hoping you could elaborate a little bit more on the commentary about the consumer changing out of the summer months. Are you seeing more trade-down? Are you seeing smaller baskets from these customers? I guess, like, what makes you concerned it's a new trend versus just a two-month period at the end of the summer? And when you say you need to work harder with these new customers, does that mean more promotional at the start? Should we assume it has some gross margin implications?

Sumit Singh -- Chief Executive Officer

Sure, sure, sure. Yeah, so it's a great question. So, are we seeing concerning trends? Not really, not yet. So, what do I mean by saying we're observing the consumer become a bit more discernible? You know, for the first time in July, we really noticed a shift out of kind of vet food more toward dry food.

And that generally is an indication of more value-seeking behavior. We're also seeing kind of treats pull back a little bit. They had gained traction in Q1 coming out of 2022, and they pulled back slightly in Q2, particularly coming out of July, right? It's not material yet to come out and actually raise any alarm bells. And we're not because we believe we're fairly insulated.

So, let me give you kind of color on what's happening. And I think to really get -- gain the color, we've sort of like broaden the aperture and gain some context here. So, from '20 to 2022, the storyline was all about dealing with the pandemic. So, coming out of last year, right, 2022 became the year of recovery.

Supply chains stabilized, but costs rose dramatically through this period and have been passed on to the consumer by way of unprecedented high prices. And these inflationary pressures are now showing up industrywide and also in pet. Now, recall that pet household formation was already muted. That hasn't changed through 2022 and continues through the first half of 2023.

In addition to that, this behavior that I am kind of calling out here, it indicates that the consumers being more value-conscious at this point. And that makes sense. I mean, to think that in times like these, the consumer preferences toward value or convenience makes sense. But the winning combination is offering them both value and convenience.

And we believe that for a majority of the consumers, we do that. We offer both value and convenience. And therefore, we believe we're somewhat insulated from the full impact of these current times, given the strength in the business model. Now, for recently acquired customers, right, we're -- their behavior is hard to predict, right? Their order purchase frequency might be slightly off.

Usually, when we see customers come back in four weeks, that might be five weeks, etc. So, we believe that we have to be extra sharp. And the CRM capabilities that we've deployed that we developed kind of toward the latter half of last year into this year, right, those are going to be much more sharply deployed toward the back half of the year. So, in terms of promos, we are not going to lead the market as we never do, right? We're price followers, we're not price leaders in that way.

But we stand ready to respond. Internally, we're going to find ways to self-fund, right, creative ways to pass on the value to the customer. And that doesn't have to be kind of promo-led per se, it could be other tactics as well. We also have a series of kind of roadmap where -- that we are taking into account in H2, as well as next year, that will formulate our strategy to both acquire net new customers, as well as improve retention of the recently acquired goal.

I can continue, but hopefully, that provides a bit of a color.

Steve Zaccone -- Citi -- Analyst

No, that was very helpful, Sumit. I appreciate all that color. I guess I just have a brief follow-up then. Do you think the overall industry gets more promotional as we get into the back half of the year? Because I'm curious, you know, after two months of activity, what you've seen, has your peer set gotten more promotional? Yeah.

Sumit Singh -- Chief Executive Officer

We do expect that. So, if you recall, we've been transparent about our expectation of greater promotionality in 2023 from our Q1 call itself. And, you know, both Q1 and Q2, we saw higher promotional activity relative to kind of the pandemic years. But the promotional activity so far has been lower than our expectations.

As we move from first half into second half, we've continued to bake in an incremental promo spend because our expectation is that promotions are going to be higher in the back half of the year. So, like I said, we're not looking to lead the market, but we stand ready to respond to make sure that customer experience and demand are both protected.

Steve Zaccone -- Citi -- Analyst

OK, thanks for all the details. Best of luck in the back half.

Sumit Singh -- Chief Executive Officer

Thank you.

Operator

Thank you, Mr. Zaccone. Our 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. Just a follow-up on previous question.

Just any color on how we should think about the gross margin for the third quarter, just given your comments on potentially higher promo for the industry as we approach the back half? And then, secondly, just as a follow-up, you had talked about 50 to 75 basis points from Canada investments this year, what was the amount in the second quarter? And should we think about the balance more or less evenly split in the back half?

Stacy Bowman -- Interim Chief Financial Officer

Sure. Hi, Anna. This is Stacy. I'll take the first question on gross margin.

So, as you know, we don't typically give formal guidance around gross margin, but we do note it is typical to see some fluctuations from quarter to quarter, but we feel good about this quarter and expect gross margin to remain around the 28% level for the balance of the year. Longer term, we're excited because we believe there is still meaningful room left for gross margin expansion. So, for example, as Sumit mentioned earlier, we continue to grow and have gained market share in existing high-margin verticals like Chewy Health, and we also are investing in and scaling new initiatives such as sponsored ads that are margin accretive.

Sumit Singh -- Chief Executive Officer

And on the second question, the EBITDA guidance essentially implies and consumes the level of investment that we are going to make. So, they started -- we started ramping investments into Canada and other verticals such as sponsored ads, etc., in Q2. And we will see those continue to ramp up through the back half of the year, which is baked into the guidance. Also, if you recall, we mentioned, in our -- on our Q1 call, we are going to ramp up new fulfillment centers that launched in the middle of the year, which has continued on its pace, and we should expect some short-term dilution as a result of that.

And then, finally, the incremental promo or promotional environment that we are talking about is also baked in. So, that's kind of formulates the way that guidance is built for -- on a profit basis for the back half.

Anna Andreeva -- Needham and Company -- Analyst

All right. Thank you so much, guys.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Ms. Andreeva. Our next question is from Dylan Carden with William Blair. You may proceed.

Dylan Carden -- William Blair and Company -- Analyst

Thank you very much. Sumit, I am just trying to reconcile the idea of a wider range of outcomes now anticipated for net customer ads, albeit still positive and keeping the guidance for the year. I'm just kind of curious what levers or optionality you might be envisioning in doing that.

Sumit Singh -- Chief Executive Officer

How we've done on exceeding our own expectations, Dylan? Is that basically the question?

Dylan Carden -- William Blair and Company -- Analyst

It seems like there is certainly kind of caution on the net customer ads in the back half and then sort of keeping the guidance as it is and where you said the third quarter. Just trying to understand -- just reconcile the two ideas that seem to be at odds. 

Sumit Singh -- Chief Executive Officer

Got it, OK. The strength that we're seeing -- the balance is essentially drawn, Dylan, from the strength that we're seeing in open customers. So, market prices are holding up pretty, pretty good. Autoship penetration rates are holding up steady.

Asset into Autoship are holding up steady. And so, our ordering frequency was higher for existing customers. And so, it's this notion of, you know, during times like these customers look to consolidate their share of wallet instead of continuing to, perhaps, cross-shop even a little bit that they do as part of their normal day to day. And so, we believe that trend will continue through the back half of the year.

Secondly, you know, we provided a bit of a data point here today stating the penetration that we're driving into our verticals, such as Chewy Health, particularly prescription food and medication. You know, that continues through the back half of the year as well. And three, our mobile app continues to gain traction. The percentage of orders that went through the app and the AOE benefits that we see for customers that are more engaged is also going to build in a little bit in the back half per se.

So, all of that essentially hold us right now. It gives us the confidence that we can deliver the back half in the way that we are. On the customer side, we -- it's more recent, right? These recent cohorts that have been a little more deal-seeking and value-conscious. And so, we're just -- we're watching this one really carefully to understand, you know, what kind of cohort behavior are being demonstrated or the repeat order rate like we expect and want them to be, is there ASP compression in basket sizes as this cohort kind of ramps up, etc., etc.

So, you know, primarily, we're going to deploy a series of tactics to make sure that we are kind of protecting ourselves, as well as serving both value and convenience. So, overall, we feel good playing out from here.

Dylan Carden -- William Blair and Company -- Analyst

Got it. And can I just sneak one just about automation? Any way to kind of quantify or scale the impact you're seeing already from automation and kind of where you are in the utilization of those facilities? I think you've given that historically.

Sumit Singh -- Chief Executive Officer

Yeah, so if you recall, we've launched four, we are on track to open our fifth one next year. Of the four that have launched, two our ramped and two are ramping. And for every new fulfillment center that we ramp, you should expect, you know, roughly 20 to 30 basis points of leverage that we will provide. Of the remaining 10 fulfillment centers, we have left room and are actively, you know, starting to retrofit with other ideas that will serve to provide leverage in the future for us.

We're actually excited to share our roadmap of the future at the investor day that we announced today in the back half of this year. So, we're always on track on the supply transformation side.

Dylan Carden -- William Blair and Company -- Analyst

Great. Thank you very much.

Operator

Thank you, Mr. Carden. Our next question is from Mark Mahaney with Evercore. You may proceed.

Mark Mahaney -- Evercore ISI -- Analyst

Thanks. I wanted to ask a question on the Canada launch and on sponsored ads. On the Canada launch, could you give us a sense of the timing of that during the quarter? Like, and if it's successful, should we start seeing that in net adds already in the September quarter? Or is it a late quarter launch? And so, if it's successful, it would only show up in Q4? And I know we're talking -- starting from nothing. So, I guess that I'd be a small contribution, but just trying to understand the timing.

And then, on sponsored ads, are you doing this all internally organically? Or are you working with third party retail media networks to start growing that? Thank you.

Sumit Singh -- Chief Executive Officer

Sure. So, on sponsored ads, we're doing most of this internally, Mark. So, that's the short version of that answer. On Canada, we are expecting launch imminently, and it starts ramping really in Q4.

So, the impact would likely start -- we will start feeling the impact in Q4, but we haven't built in any materiality in our forecast for this year.

Mark Mahaney -- Evercore ISI -- Analyst

OK. Thank you, Sumit.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Mr. Mahaney. Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks, guys. A couple of follow-ups. The cross-category form of penetration 20%, where do you think that can get to at maturity, and is that accelerating? And then follow-up on NSPAC hitting 530, can you opine a little bit on what's going on with household spend and how much of that you think you can eventually capture as you continue to add different products and different SKUs and services?

Sumit Singh -- Chief Executive Officer

Sure. Hi, Brian. On the cross-category for Rx, you know, in one of our top priorities inside the company is one where we believe every active Chewy customer should also be a Chewy Pharmacy customer. So, there is a lot of headroom here for us, and we are excited about that.

And yes, on a year-over-year basis, it is accelerating or has accelerated and so all positive here. NSPAC, household spend can be captured. We believe we are -- for our loyal customers, we're likely capturing a majority of their spend in the food and health segment today. You know, supplements was an opportunity for us two years ago, but we closed that gap pretty credibly last year, which has actually also contributed to the NSPAC expansion for us.

So, on these merch classes that constitute food, toppers, health, whether it's diet or prescription medication or OTC, or supplement, we believe we are actively consolidating and gaining share. And that truly is kind of where the consumers' mindset is today. Because if you recall, what's happened is consumer allocated $100 toward pets. In the past, it used to be $80 on consumables and health, $20 on hard goods.

That $20 hard goods essentially shifted out of there. And most of that is now being spent on consumables and health, and it will remain so up until the macro recovers, in our opinion. Long term, we're actually -- you know, the fact that the spend continues to move from offline to online, I believe, we will emerge as a stronger company in the future, given both our base, the level of investments that we've made through the pandemic, and the execution quality that the team continues to demonstrate. Overall, we're much -- we're bullish about the future.

We all collectively have endured just a short-term macro as it played through.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thank you so much. Appreciate it.

Operator

Thank you, Mr. Fitzgerald. Our next question is from Lauren Schenk with Morgan Stanley. You may proceed.

Nathan Feather -- Morgan Stanley -- Analyst

Hi, everyone. It's Nathan Feather on for Lauren. Perhaps, you could dig in a little bit more on the industry that Chewy Health roadmap. What gets you from the, you know, kind of encouraging 20% cross-category penetration today to the goal of 100%? And from the pharmacy side, how much of that is SKU expansion versus getting more customers to discover and adopt it? Thank you.

Sumit Singh -- Chief Executive Officer

Yeah, so it's primarily -- it's a great question. Primarily -- our primary challenge is the discoverability of this platform and, you know, essentially winning customer trust. If you noticed, or if you recall, I may have mentioned this data point. A third of the customers today in the United States don't visit their pets at a recurring frequency or don't consume medication at the recurring frequency.

And so, you know, we have an opportunity to not only expand the current TAM that we see in this particular space, we also have the opportunity by driving -- essentially by driving incremental compliance. And that has truly been the power of how we go to market with customers on the back of our Autoship platform. So, you know, our Autoship eligibility for pharmacy is at par or even higher than our consumables businesses, and we are rapidly innovating to make sure that customer sign -- any kind of friction around customer experience, whether it's signup or whether it's discovery or whether it's sort of checkout is being addressed actively by the team. Overall, our NPS on this platform continues to remain high, and we're pretty proud to serve a large base of customers.

So, this is less about adding SKUs, it's much more about just making sure that there is awareness, as well as discoverability.

Nathan Feather -- Morgan Stanley -- Analyst

OK. Thank you.

Operator

Thank you. Our next question is from Trevor Young with Barclays. You may proceed.

Trevor Young -- Barclays -- Analyst

Great. Thanks for the questions. First, on a category basis, it looks like hard goods returned to growth in the quarter. Is that kind of consistent with your expectations, and do you expect that cadence to improve from here? Or does that more discerning customer and tougher compares, make it likely that growth stays a bit more challenged? And then, any update on the insurance initiative with Trupanion and Lemonade.

I think that's now available nationwide. Just any initial comments on uptick there relative to your own expectations? And can you shed any light on how that maps to the P&L? Thank you.

Stacy Bowman -- Interim Chief Financial Officer

Hi, Trevor. This is Stacy. So, I'll take the hard goods question, first. So, historically, we always do have some seasonality in our hard goods sales with a small pullback between the first and second quarter.

So, that, also combined with the value-seeking behavior that Sumit spoke about shown by the consumer recently, contributed to some softness in hard goods growth for this quarter. Our expectations for the rest of the year have not really changed. Yeah.

Sumit Singh -- Chief Executive Officer

On hard goods, it's also easier comps. If you noticed last Q2 was a negative, almost high single-digit, low double-digit decline. And so, you're comping a much softer year from last year. On insurance, we are super excited about having two best-in-class providers on our platform, Trupanion and Lemonade.

As expected, what it has done is, it's opened up the range of plans and choices across various different price points and coverages to a wider range of our customers. And as you would expect, you know, what that has translated to is the rate of policy signup has gone up proportionately because, you know, you opened up the assortment, it drives to incremental revenue on a pretty indirect coordination basis. So, while that's a really positive data point, you know, this vertical itself requires a ton of education and awareness. And we're seeing our metrics head in the positive direction.

Our, you know, quote-to-conversion rate or call-to-quote rate and quote-to-conversion rates are all improving. As you would expect, our customer care team is actually becoming a pretty powerful source of educating customers about insurance and, therefore, also driving, you know, on a high-cost basis, providing the information and driving the conversion. This was always our hypothesis to start with because you don't really buy insurance online, you buy it via kind of these assisted channels. And we have one of the best assisted channels out there.

So, overall, we're super excited about what's to come. I must kind of note on you that this is a bit of a longer arc vertical, given that the consideration cycle for customers is longer. So, we're going to be appropriately patient and play this game over the long term.

Trevor Young -- Barclays -- Analyst

Thank you.

Operator

Thank you, Mr. Young. Our next question is from Seth Basham with Wedbush. You may proceed.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot, and good afternoon. I was wondering if you could provide some color on gross ads relative to 2019 like you did in recent quarters and then also provide some color on CAC trends year over year sequentially.

Sumit Singh -- Chief Executive Officer

So, gross ads continue to run higher than 2019. We're not entirely dissatisfied by the pace of our gross ads. We believe the team has executed incredibly. Yes, the categories that are muted are, of course, you know, are causing a pullback on gross ads.

I think Doug mentioned whether like the contribution of hard goods is weighing in on customer acquisition. It absolutely is. But on the balance, we're not totally dissatisfied by the pace of gross ads. Net new to Chewy, you know, is slightly softer than pre-pandemic, but reactivations are much stronger than pre-pandemic.

So, if you combine those two, the overall output is that gross ads is stronger than 2019. And then, color on CAC, not much has changed from what I believe I shared last-time, which is, you know, the CAC has increased over the last couple of years, at least through the -- as we've come out of the pandemic. Because then, you were picking up -- you know, everybody was declaring intent and you were picking up customers quite economically. But candidly, when viewed from the lens of LTV to CAC, LTV has also continued to go up.

So, our ratios have actually very nicely maintained. And from an ROI standpoint, you know, we're spending where we believe we should be spending from a marginal point of view. The reason CAC continues to go up right now and will remain high up until the macro recovers in my opinion is, A, there is a shallower pool of customers declaring intent. So, clearly, the competition for the same customer is higher, and that drives up the bid rate.

And then, B, recall that social used to be a pretty active channel a few years ago, and the loss of targeting has actually led to a loss of yield that drives up CAC in the social channels. So, it's a combination of those two. But LTV is going up appropriately.

Seth Basham -- Wedbush Securities -- Analyst

That's helpful. And just as a follow-up, is LTV going up appropriately for the most recent cohort customers, too? And if not, is that LTV direct CAC ratio is weakening for the most recent cohorts? Are you going to adjust where you're spending to find new customers?

Sumit Singh -- Chief Executive Officer

We always do, actually. So, the cumulative contribution profit is what we go after. And, you know, we're always trying to sort of find that tangential point where the steps over to the fact where -- to the point where the campaign actually becomes negative-returning. So far, the team has been very diligent.

And we've actually experimented with, you know, trying to spend money to pick up, you know, discretionary customers, and it's just not a high ROI effort right now. So, we're not really going after that because we would rather maintain the quality that drives the repeat purchase. Otherwise, you never really get out of this spiral of churn and spending money to keep that customer per se. And so, we are -- you know, our engines, our performance marketing teams appropriately adjust to find, you know, the best customer, the best return across the best channel.

And that is done, you know, on a daily, weekly, monthly basis, not on a quarterly basis. We're fairly responsive.

Seth Basham -- Wedbush Securities -- Analyst

Thank you.

Operator

Thank you, Mr. Basham. Our next question is from Lee Horowitz with Deutsche Bank. You may proceed.

Lee Horowitz -- Deutsche Bank -- Analyst

Great. Thanks for taking the questions. Two, if I could. When you think about the consistently challenged pet household growth environment, do you think that you need pet household growth to turn more meaningfully positive in order to return Chewy back to more meaningfully positive user growth in the medium term? And then, maybe digging in again through these recently acquired cohorts in the platform and some of the caution you are seeing among these users, can you talk a bit more specifically on what you maybe you're seeing from these cohorts in terms of repeat purchase rate, Autoship penetration, and basket size relative to the core? Anything that these users are flagging to you as way this degree modest caution that leads you to believe maybe this is just structurally higher churn than your existing base? Thanks so much.

Sumit Singh -- Chief Executive Officer

Sure. Sure. On the first question of do we need them to turn more meaningfully positive, well, there is certainly a factor. Household penetration is a factor and that -- it is an important input into the model.

But it's not the -- it's not what we are solely dependent on. In fact, you know, for -- you know, our teams are progressing multiple features across chewy.com, which we expect -- and this is all kind of in the back half, which will continue -- some of this will continue into next year per se. Our team is progressing multiple features across chewy.com, which we expect -- where we will expect to credibly reduce friction and lower conversion barriers in areas of, for example, account creation and improve both signup rate, as well as customer retention, right? So, some of the specific examples might be in areas of account creation, payments, our content platform, our CRM mechanisms, you know, or we've talked about, you know, which I will discuss more in detail at our next earnings call, we're super excited to talk to you about Chewy Loyalty, which we're progressing for an early 2024 launch. So, we're not sitting idle, waiting for the macro to recover, right? It's just this notion of what cannot be cured has to be endured.

So, we're going to endure that. And at the same time, everything that is controllable on our side, which is improving experience and opening up net avenues to acquire and retain customers, we are absolutely focused on that. And then, your second question was with the more recent cohorts, what are you seeing on repeat order frequency? We're seeing the repeat order frequency that -- it's essentially what I was mentioning earlier. Autoship penetration actually is fairly intact.

Their basket sizes are slightly lowered, you know, because they're more value speaking, so, you know, obviously, there is an ASP compression that is taking place there. Their attach rates are slightly lower, so the units per order metric is where you will see that impact, which ultimately goes back and kind of talk to the basket size also. Repeat order frequency, you know, they need a little more nudge relative to our kind of loyal customer bases. So, we're just -- we're watching right now.

And that -- we've essentially baked that into the guidance, and we're baking that into the active customer ads forecast as well.

Lee Horowitz -- Deutsche Bank -- Analyst

Very helpful. Thank you.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Thank you, Mr. Horowitz. Our next question is from Steven Forbes with Guggenheim. You may proceed.

Steve Forbes -- Guggenheim Partners -- Analyst

Good evening, Sumit, Stacy. Just two quick follow-ups, one on Autoship and one on pharmacy. So, first on Autoship, Sumit, can you comment on how the average number net ownership ordered by customer within some of your more mature cohorts are trending relative to plan? And then, on pharmacy, can you also talk about like how the customer journey for pharmacy customers has evolved over the years, such as time to trial, usage statistics, Autoship adoption, and maybe most importantly churn rate, right, among those customers that try and convert into pharmacy earlier in the lifecycle?

Sumit Singh -- Chief Executive Officer

Sure. I may not be able to satisfy your full curiosity relative to some of the metrics that you're asking, but I'll build your intuition generally in stating that Autoship continues to be more powerful in a way that it is accreting value for customers and passing that value onto customers. We've done that by making sure that the assortment under Autoship is maximized. We've also done that by making sure that barriers to either Autoship conversion, you know, or Autoship retention, whether there may be payments-related or whether they may be attach-related have continued to be lowered.

Our improvement in segmentation and targeting ability does, you know, allow us to speak with customers a little more meaningfully, and that'll only get better in the future. And then, you know, from a cohort development point of view, you know, we've invested across our kind of discoverability and attach engines to make sure that customers not only discover, you know, complementary attach products but are essentially attaching through them, you know, in a meaningful manner. So, all of this is essentially leading to, you know, the incremental Autoship sales that you're looking at. You know, Autoship, the beauty of Autoship is it is a very flexible program, and customers trust that they won't -- they both trust the flexibility and they have come to trust and reliability that we put behind Autoship.

And so, it's a high-value program from that point of view, not only from a pricing point of view but also from an overall experience point of view. On the Rx side, this is the -- we believe we have the best healthcare experience that e-commerce can offer or that customers can find, you know, in the best of kind of retailers out there per se. So, our metrics on pharmacy, you know, our adoption -- Autoship adoption is even higher in pharmacy than it is in some of our other merch classes. Our churn rate is lower, given how high a bar we have.

And at the same time, you know, we always have opportunity that we're working on to make sure that we get even better with products like these. So, overall, we're excited about this vertical.

Steve Forbes -- Guggenheim Partners -- Analyst

Thank you.

Operator

Thank you, Mr. Forbes. Our last question is from the line of Rick Patel with Raymond James. You may press proceed.

Rick Patel -- Raymond James -- Analyst

Thank you. Good afternoon, everyone. Can you talk about what you're seeing in terms of spending by cohort for those customers that are not new to Chewy? So, I appreciate that NSPAC is growing, but just as we think about how much customers are spending further along in their lifecycle, I'm curious if you're seeing changes in that trend line.

Sumit Singh -- Chief Executive Officer

Yes, we are. We absolutely are. In fact our -- you know, like our more recent cohorts are slightly -- as we've kind of mentioned on this call, they require a little more nudging. But the NSPAC development curves through our older cohorts.

If you look at the three main factors of NSPAC development, right, cohorts maturity leads the way, right, followed by kind of the other two, which is a combination of, you know, Autoship plus health and other merch plus is kind of mixing it per se. So, without kind of talking to specific numbers, hopefully, that's enough intuition building. If not, happy to take a double click.

Rick Patel -- Raymond James -- Analyst

Great. And can you also talk about your go-to-market strategy for Canada? How are new customers going to learn about Chewy and how are they going to experience the brand? And anything to think about in terms of marketing spend over the next couple of quarters as you ramp in Toronto?

Sumit Singh -- Chief Executive Officer

Yes, sure. So, this is some -- this is -- we're very excited about this. We are going to -- I think the punch line here is that we will -- our aspiration is to show up in Canada as a Canadian brand, not as an American brand, you know, that -- essentially, what you should hear in that statement is, you know, we will -- we are going to try and understand the customer, their needs, their wants, their desires, their behaviors, and then model the offering in a manner that appeals to them in the best possible manner. That, by the way, is also the most efficient way to market to customers and the most efficient -- and a way of keeping our cost, you know, minimalized per se.

We're going to be much more, you know, focused on delivering the experience through kind of trusted proven mechanisms that we have here in the United States. Those, we do believe, carry over pretty nicely. I was in the Canadian market with the rest of the senior leadership team a few weeks ago, sort of walking the stores and the experience all the way from our fulfillment side to the delivery side to the end market. And, you know, we're excited.

There's going to be a ton to learn here. We're going to try and self-fund a bunch of this. And at the same time, whether investment is required, we'll be upfront and candid about them. Overall, we're looking for high-quality, you know, growth, not dilutive growth here.

Rick Patel -- Raymond James -- Analyst

Thank you. All the best.

Sumit Singh -- Chief Executive Officer

Thank you.

Operator

Thank you, Mr. Patel. That is all the time we have for questions. I will now turn the call over to Sumit for any closing remarks.

Sumit Singh -- Chief Executive Officer

Thank you very much. Just want to welcome Stacy again and wish everybody a nice evening. Thank you.

Stacy Bowman -- Interim Chief Financial Officer

Thanks, everyone.

Operator

That concludes today's Chewy's second quarter fiscal year '23 earnings call. [Operator signoff]

Duration: 0 minutes

Call participants:

Jen Hsu -- Vice President, Investor Relations

Sumit Singh -- Chief Executive Officer

Stacy Bowman -- Interim Chief Financial Officer

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Eric Sheridan -- Goldman Sachs -- Analyst

Steve Zaccone -- Citi -- Analyst

Anna Andreeva -- Needham and Company -- Analyst

Dylan Carden -- William Blair and Company -- Analyst

Mark Mahaney -- Evercore ISI -- Analyst

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Nathan Feather -- Morgan Stanley -- Analyst

Trevor Young -- Barclays -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Lee Horowitz -- Deutsche Bank -- Analyst

Steve Forbes -- Guggenheim Partners -- Analyst

Rick Patel -- Raymond James -- Analyst

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