Chewy (CHWY) Q3 2023 Earnings Call Transcript

Chewy (CHWY 2.99%)
Q3 2023 Earnings Call
Dec 06, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone. Thank you for attending today's Chewy third quarter 2023 earnings call. My name is Ciara, and I'll be your moderator today. 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 like to pass the conference over to our host, Jen Hsu, with Chewy. Please proceed.

Jen Hsu -- Vice President and Head of Investor Relations

Thank you for joining us on the call today to discuss our third quarter 2023 results. Joining me are Chewy's CEO, Sumit Singh; and interim 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 third quarter of 2023 and all comparisons are accordingly against the third 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 jump in, as we have previously announced, we will be hosting our inaugural Investor Day next week on Thursday, December 14th. We look forward to seeing many of you in person and encourage everyone to tune in to the live webcast, which can be found on our investor relations website. I am excited to introduce you to our broader senior leadership team next week.

We plan to provide a comprehensive update on our strategic road map, including a deep dive into our Chewy Health business, and we'll share refreshed long-term financial targets. In light of our Investor Day next week, we will streamline today's call to focus on this quarter's results and a few notable recent updates. We will leave most strategy and innovation topics for next week. Now, let's review Q3.

Chewy continues to outperform and gain market share through the present environment. We reported $2.74 billion in net sales this quarter, up 8% against an industry that grew in the low single digits, with pet inflation continuing to return to historical levels. Additionally, the team is executing admirably against controllable factors, as reflected by another strong quarter of 3% adjusted EBITDA margin. Consistent with the expectation we shared on our last earnings call, active customers declined marginally on a sequential basis.

Looking beyond the near term, we believe we remain well-positioned to drive improved active customer trends as the macro environment and pet household formation trends recover. Notably, we yet again demonstrated our ability to grow wallet share with our customers as net sales per active customer, or NSPAC, exceeded $540, up nearly 14%. Throughout the third quarter, customer engagement remained strong. Our industry-leading mix of nondiscretionary consumables and health, bolstered by our Autoship subscription service, continues to reinforce the structural soundness and defensible nature of our business model.

The loyalty and spending resiliency of our Autoship customers remains unabated, with no changes to their ordering behavior. Additionally, our conversion of new customers into Autoship continues at a healthy rate. As a result, Autoship customer sales continued to outpace overall top-line growth and were up nearly 13% in the quarter and represented over 76% of net sales. Nondiscretionary consumables and health categories anchor our business, collectively representing approximately 85% of third quarter net sales.

Pharmacy continued to grow at a premium to the overall company and now represents north of $1 billion business for us based on trailing 12-month net sales. At this scale, Chewy is the No. 1 pet pharmacy in America. We look forward to sharing more with you about the financial performance and strategic direction of our health business holistically at next week's Investor Day.

As anticipated, we launched Chewy Canada at the end of September, bringing Chewy's compelling value proposition to millions of pet parents in Canada. Initial customer demand has been strong. Autoship sign-up rates are healthy, our delivery experience is compelling, and customer satisfaction is high. While it is early, we are pleased with our progress in market thus far, with key indicators of success pointing toward a bullish future.

Turning to profitability. We reported gross margin of 28.5%, which is a new record in itself. Strength in gross margins reflects mix/rate benefits, tightly managing promotional spend, and strong performance in logistics by our team. Finally, adjusted EBITDA margin came in at 3% for the quarter, even during a period in which we had planned pronounced growth investment.

Shifting gears from end-quarter results. I'd now like to provide some commentary on how we performed on Black Friday and Cyber Monday of this year. We observed strong customer purchasing intent during this important holiday shopping week. Traffic and sales exceeded our expectation across all categories, including hard goods, and conversion rates were up year over year.

New customer acquisition was 40% higher than our Q3 weekly average. While we have seen trends return to pre-holiday levels, our Black Friday and Cyber Monday performance is encouraging. Specifically, while consumer spending behavior remains opportunistic in the current environment, our results illustrate that Chewy's value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve. Before I turn the call over to Stacy, I would like to share some context regarding a couple of important companywide developments.

In November, as part of our 2024 strategic planning process, we implemented actions to reduce our headcount in certain areas of the organization. This decision was carefully considered as part of our ongoing focus on becoming an ever more agile and disciplined company and aligns our efforts into priorities, which we believe will gain us the most significant customer wins and generate the highest business returns. While we consolidated some roles within the organization, we continue to invest in other high-priority areas. As we head into 2024, we expect these actions to create room for us to continue investing behind our growth initiatives.

We are incredibly grateful to our team members for their contributions and remain committed to supporting them during this transition. Lastly, I am excited to announce that David Reeder will be joining us as Chewy's new chief financial officer starting early in 2024. Dave joins us from GlobalFoundries, where he is currently CFO. He brings with him extensive experience across a multitude of operational and financial roles at GlobalFoundries, Lexmark, Cisco, and Broadcom, among others.

I look forward to working with Dave as we continue to execute against the many compelling growth and margin opportunities across our ecosystem. I would also like to thank Stacy for all that she has done to support me and the Chewy team in her role as interim CFO. Following Dave's start date, Stacy will continue to serve as our chief accounting officer. With that, I will turn the call over to Stacy.

Stacy Bowman -- Interim Chief Financial Officer

Thank you, Sumit, and thank you all for joining us today. In the third quarter, net sales grew 8.2% to 2.74 billion. Autoship customer sales growth outpaced total net sales growth by almost 460 basis points and came in at 2.09 billion in Q3, up 12.8%. Autoship customer sales now represent 76.4% of total net sales.

We ended the third quarter with 20.3 million active customers. Our primary measure of customer engagement, NSPAC, grew 13.8% year over year to $543, yet again reaching a new record high. 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 28.5% in Q3. Our Q3 gross margin highlights our ability to deliver steady margin accretion in this part of the P&L, and we continue to believe there is meaningful room for continued gross margin expansion over time. Continuing on to opex. SG&A totaled 545.9 million, or 19.9% of net sales, deleveraging 30 basis points compared to the third quarter of 2022.

This increase was largely driven by investments related to our growth initiatives. Q3 advertising and marketing expense was 179.2 million, or 6.5% of net sales, consistent with our expectation of 6% to 7% of net sales. Third quarter adjusted net income was 63 million, an increase of 14.6 million. Third quarter adjusted EBITDA reached 82.1 million, up 11.7 million, implying an adjusted EBITDA margin of 3%.

Third quarter free cash flow of 48.5 million continues to be strong, reflecting 80.2 million in net cash provided by operating activities and 31.7 million in capital expenditures. Our third quarter trailing 12-month free cash flow was over 300 million and demonstrates our ability to execute sharply and generate meaningful cash flow through all economic environments. Capital expenditures continue to be comprised primarily of automated fulfillment center investments and ongoing technology projects. As planned, our capex spend tapered this quarter following above-average capex intensity in the second quarter, and we expect 2023 capex to remain in the range of 1.5% to 2% of net sales, consistent with past investment levels.

We finished Q3 with 957.2 million in cash and cash equivalents and marketable securities, nearly 351 million higher than the balance at this time last year, and we remain debt-free. At the end of Q3, between cash on hand, marketable securities, and availability on our ABL, our liquidity stood at 1.7 billion. That concludes my recap of our third quarter results. So, now, let me cover our fourth quarter and full year 2023 guidance.

While we remain confident in the overall resilience of the pet category, as well as Chewy's ability to deliver growth above industry average, in light of the near-term macro environment, we are updating our top-line guidance as we head into year-end. We expect fourth quarter net sales to be between 2.78 billion and 2.8 billion, representing year-over-year growth of approximately 3%. We are narrowing and revising our full year 2023 net sales outlook to be between 11.08 billion and 11.1 billion, representing growth of approximately 10% compared to full year 2022. We are reiterating our full year 2023 adjusted EBITDA margin outlook of 3%.

As you update your models, also note that we expect our free cash flow for full year 2023 to be in excess of 2.5 times the free cash flow we generated in full year 2022, implying an adjusted EBITDA to free cash flow conversion rate north of 80%. Our third quarter results once again demonstrate Chewy's unique ability to deliver strong results in the current environment. We expect to continue taking share and expanding profitability while the pet industry works its way back toward steady-state trends, and we remain highly encouraged by the various strategic opportunities that lie ahead. We look forward to seeing many of you next week.

With that, I will turn the call over to the operator for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today comes from Eric Sheridan with Goldman Sachs. Please proceed.

Eric Sheridan -- Goldman Sachs -- Analyst

Thank you so much for taking the question. I just want to come back to the Q4 guidance on the revenue side. Can you walk through some of the headwinds and tailwinds we should be thinking about in terms of the revenue build for Q4 and how much of this is down to broader promotional or competitive intensity versus elements of the macro environment and basket size or just the lapping effect of inflation from a year ago? Thanks so much.

Sumit Singh -- Chief Executive Officer

Hey, Eric. This is Sumit. So, I'll speak to it. Our guidance reflects sales growth that is expected to outpace the industry, first of all.

So, we're continuing to see changes happen post our commentaries from the July, August time frame when we last spoke. So, here's -- here are a couple of main points. When you look year over year, the revenue composition is shifting out of pricing and more into structural unit and attach. So, there is little or no benefit from pricing from a comp point of view.

That, combined with continuing lower mix of hard goods and discretionary this year relative to last year, explained sort of the year-over-year comps that you're seeing. As it relates to guidance, the softness that we called out last quarter that we started seeing in the July, August time frame has persisted. We're seeing the impact of this softness most materially in the non-Autoship portion of our business, so the 25% of the business that doesn't go to Autoship, and primarily across highly discretionary components, some consumable components. This is related and coupled with the impact of the newer customer cohorts that we talked about last time where loyalty is still continuing to be earned, right? These customers are early tenure, and we're taking steps to engage with them and making forecasting a little bit difficult across the macro that is keeping discretionary soft and over-on spending patterns a little bit opportunistic.

So, you know -- so that is all reflected in the new guidance that we're providing. We came out of last quarter starting to see these trends. The trends have sort of persisted. So, this time was the right time to make the call to update the guidance as we're seeing it at this time.

You know, having said all this, you know, we have a moat in the Autoship portion of the business that remains strong and has proven to be resilient through to the current macro per se. I'm happy to take a follow-up. And I just want to reiterate that at the midpoint of our '23 net sales guidance, we will deliver approximately 10% growth year over year, which is share-gaining. And then next week's Investor Day, we intend to share additional perspective on our long-term growth algorithm and expectations.

Eric Sheridan -- Goldman Sachs -- Analyst

Great. Thanks for the color, Sumit.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

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

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thanks for taking the questions. Sumit, I got the color there on 4Q revenue. Can you just help us square a little bit the strong Black Friday and Cyber Monday performance you called out with the rest of the outlook for 4Q? Is that just purely promotional-driven, and I guess why does that give you some degree of longer-term confidence? And then second, perhaps you can just provide a little bit of color on how you're thinking about gross margins in 4Q. Obviously, the EBITDA -- implied EBITDA guidance is down.

You mentioned a few things there on revenue. But is that related to promotions, normalizing inflation, some seasonality, any other factors we should think about?

Sumit Singh -- Chief Executive Officer

Sure. There's a lot there nicely [Inaudible] there's a lot there. So, let me decouple it one by one and Stacy can jump in at any point if I miss anything. So, first of all, you know, promotional activity during Black Friday was slightly steeper than prior year, although it remained broadly rational.

So, what we are essentially calling out is the way that we went to market, the specific offers that we took to market, the way customers engaged with the overall proposition. Our existing customers engaging, along with some -- along with the healthy mix of new customers that we picked up, essentially signals to the fact that, structurally, right, the business is sound, and when stimulated the right way and customers being in the right mind frame, they do respond. So, it sort of speaks to the tenability of the industry rebalancing, you know, once customer pressure sort of abates. That's the reason we provided those commentaries.

We thought it would be helpful. Overall, the way that we're thinking about gross margin, we expect to hold within the 28% range, you know, that we've been communicating so far. So, we don't expect an impact to gross margin because, you know, we expect a promotional environment moving forward to remain rational with typical seasonal guardrails similar to what we've observed over other Black Fridays, Cyber Mondays. Happy to provide more promotional color in the way that we've played through Q4.

So, all of the Q3 implied EBITDA that you're seeing is essentially as a result of incremental dollars spent during this Black Friday, which was roughly approximately 30 basis points higher than last year. So, that component is building in. And then two, our growth investments started flowing through in Q3 and are continuing to flow through to Q4. So, if you normalize for that, it essentially gets you back to the healthy levels of EBITDA that we've delivered in the front half of the year.

Anything to add, Stacy?

Stacy Bowman -- Interim Chief Financial Officer

Yeah. I would just reiterate that our Q4 profitability reflects the usual seasonal impact of holiday promotional activity. But as Sumit just mentioned, it was largely rational and within our expectations, and we will see some investment behind our growth investments. So, that flows through to the adjusted EBITDA.

But I do want to reiterate that we are really proud that we're able to self-fund our growth, and so we continue to do so throughout the year.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thank you, both.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our next question comes from Lauren Schenk with Morgan Stanley. Please proceed.

Nathan Feather -- Morgan Stanley -- Analyst

Hey, everyone. Thanks for taking my question. This is Nathan Feather on for Lauren. Can you dig a bit more into the direct impact of macro across each of gross adds, churn, and NSPAC? And then is the embedded macro environment in the 4Q guide worsening for 3Q or is it just largely stable? Thank you.

Sumit Singh -- Chief Executive Officer

Hey, Nathan. This is Sumit. So, on the macro, it is -- you know, the trends that we started seeing coming out of Q3 have largely persisted, right? For the most part, you're seeing discretionary -- the spending in discretionary being low persisting, you're seeing a shift out of that into drive persisting. So, nothing has broadly changed.

We're not seeing broad trade-downs happen on our side. So, you know, customers that are engaging with premiumized assortment aren't the ones essentially trading down. So, loyalty within core consumables categories and customers' general reluctance to switch from a proven food that works well for their pet, that is pretty intact. The power of the Autoship model, which facilitates the stickiness and behavior, is intact.

And all of the softness that we're seeing is primarily in our non-Autoship-driven businesses, which are more egregiously weighted toward, you know, discretionary, including categories such as treats per se. You had a second part to your question, I think.

Nathan Feather -- Morgan Stanley -- Analyst

Additional commentary on NSPAC, gross adds.

Sumit Singh -- Chief Executive Officer

Our commentary on customers hasn't necessarily changed. You know, we guided in Q3 that we expect a wider outcome. You know, if you can -- I mean, of course, we've been about roughly 100,000, 150,000 customers down on a year-over-year basis, on an average, 100,000 customers. We don't expect to make that up.

And our customer sentiment doesn't change, you know, up until sort of the macro starts resolving. We're happy with the way that we played through Black Friday, Cyber Monday. We're happy with the way customers are responding to us across our consumables, Autoship, health type categories. Our reactivation rate remains pretty strong.

So, all of those are positive trends. Q4 typically comes with a very high mix of seasonal discretionary categories. And if you look at it from a year-over-year perspective, it's down relative to last year. But compared to 2021, discretionary is down roughly on a mix basis, roughly 15%.

And that, definitely, has an impact.

Stacy Bowman -- Interim Chief Financial Officer

Yeah. I would just go back to the NSPAC point as well. We continue to meaningfully expand our wallet share. So, it continues to show our loyal customer base, and they continue to penetrate into other categories such as our high-margin health category and whatnot.

So, we are seeing some growth there, as demonstrated over -- by our record high this quarter.

Nathan Feather -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Our next question comes from Anna Andreeva with Needham. Please proceed.

Anna Andreeva -- Needham and Company -- Analyst

Great. Thanks so much. Good afternoon. A couple from us.

I guess, as we continue to see inflation as is the state into next year and the consumer remains pretty price-sensitive, how do you think about the trade-down for Chewy in margins versus top line? I guess, in other words, would you pull back on promotions to this non-Autoship customer to preserve margins or not necessarily? And secondly, just to follow up on Canada, did you break out Canada in terms of net adds and sales during the quarter and are you seeing similar consumer behavior with trade-down to value in the region as well? Thanks so much.

Sumit Singh -- Chief Executive Officer

Sure. Hi, Anna. So, first of all, our discounting/promo spend isn't materially elevated. From the beginning of this year, we had said that, you know, there's an opportunity that we might spend up to 30 basis points higher in promotions on a year-over-year basis.

And so far, you know, we would -- we had not seen, you know, the environment where that spend had come true, and we've seen it only during the holiday period, where our discounting/promotional spend was roughly 30 basis points higher than last year. And beyond that, we've gone back to our normal levels of discounting, which may be very slightly elevated now, just responding to seasonal patterns. But broadly speaking, promotionality, you know, remains relatively rational from our vantage point. Also, we want to make sure that it is clear that, you know, our ability to navigate through kind of the promotional variability, you know, however small it might be, is reflected in -- you know, reflected through the continuous kind of strong gross margin performances.

And last, I would say, you know, we continue to work closely with our supplier partners, you know, to ensure a high degree of MAP compliance, which essentially protects prices and large variability in the pet space. And we expect MAP discipline to be enforced by the overall market as we continue to move through Q4 and beyond. So, that was the first part of your answer. Number two, in Canada, yes, we liked the business the way it's performing.

We're continuing to add assortment and open up, you know, geography, which we will come talk to you here in the next one to two quarters, alongside, overall, in FY '23, the business has not a material impact. So, we'll stay away from providing numbers or guidances accordingly. And we're seeing consumers respond well to promotions around the Boxing Day time frame. And even there, we've actually pulled back and gone back to leading our businesses or building it via a recurring theme in mind.

So, we are heavier on Autoship and not so much on non-Autoship-type transactional offers.

Anna Andreeva -- Needham and Company -- Analyst

All right. Fair enough. Thanks so much.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our next question comes from Rick Patel with Raymond James. Please proceed.

Rick Patel -- Raymond James -- Analyst

Thank you. Good afternoon, everyone. I just had a question on active customers. So, to what extent are you still being impacted by churn of COVID cohorts in terms of the headwind? And as we think beyond macro and pet household formation, can you talk about the levers you have to accelerate new customers that are under your control? I'm curious if you would consider leaning more into discounting or marketing to get more consumers into your ecosystem.

Sumit Singh -- Chief Executive Officer

Sure. So, our COVID cohorts, I'm just looking at the data here, they continue to settle out well, and the highest amount of churn that we're seeing is actually in the near-term cohorts. So, I provided a little bit of color on this in my -- in the last quarter's earnings script around customers that were picked up in the '22 or the near-term cohort that were demonstrating more discretionary-type behavior. Beyond that, our COVID cohorts continue to settle out well and churn rate there, you know, has continued to stabilize now that we're past the two-year mark for the 2020 cohort and the '21 -- for the most part, '21 cohort as well.

And so, just to be sure, you know, we've been consistent in saying that their retention was, you know, just low single-digit percentage point lower than our classic kind of best high-quality legacy cohorts, and that theme has essentially stayed consistent as well. The second part of your question is what levers do you have to accelerate new customer growth? Will you lean into discounts on marketing? So, marketing, our philosophy, as you know, is not to govern ourselves with a specific dollar amount, rather to essentially spend up to the point where we see profitable returns. So, it's a more fluid budget, and our marketing teams are fully empowered. You know, a large portion of our spend is lower funnel, with healthy mixes into mid and upper funnel.

So, while upper funnel budget is less flexible, you know, on a lower funnel basis, we react based on how we see market demand and consumer kind of predictive lifetime value per se. So, we're optimizing there appropriately, in our opinion. You know, the discretionary that actually drives a very healthy level of customer acquisition into the platform, of course, is muted, and the gaps that we're seeing primarily from a historical point of view are all deltas that are coming from those categories, primarily our premium businesses, you know, continue to outpace historical acquisition rates, which we're happy about because they build high-quality cohorts. In terms of discounting, we've always believed in building, you know, a high-quality recurring business, less so a transactional business.

We leaned into, you know, discounting tactics early in '23 and late in '22, and that is part of the reason why we believe these cohorts are not as sticky as our legacy cohort. So, that's a good lesson learned. Even though our intuition was true, you know, we went out, tested it, found it to be true again, and we've pulled back on that pretty dramatically. We don't expect to bring that back.

Yeah, happy to take a follow-up.

Rick Patel -- Raymond James -- Analyst

Thanks very much.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our next question comes from Steven Zaccone with Citi. Please proceed.

Steve Zaccone -- Citi -- Analyst

Great. Good afternoon. Thank you very much for taking the question. I wanted to follow up on the pricing discussion.

So, it sounds like the fourth quarter outlook embeds that pricing will basically be flat year over year. Is that the right way to think about your initial outlook for '24? You know, we've heard more about pet food supply coming to the market, so I'm just curious how you think pricing trends into next year.

Sumit Singh -- Chief Executive Officer

Yeah. It's a good question. So, a couple of points there. First, you know, from our vantage point, we do not expect deflationary pressure in the consumables or the health categories.

You know, we -- we've heard certain questions or acknowledged that there's been commentary out in the market around potential food deflation in the near term. You know, we do not believe that deflationary pressure, which may exist or impact traditional grocery and food players, will translate into the pet category, right? There's a -- consumables in pet category are branded. Our vendors have significantly invested. And jointly, you know, we are motivated in protecting MAP pricing framework, which, broadly speaking, does not exist in conventional grocery per se, which is nonbranded.

So, anyway, so that's the comment there. Second, you know, pet inflation continues to come down, and this quarter, running at mid-single digits. You know, ultimately, we believe this will very quickly come down to low single-digit levels and there will be no impact of pricing or no benefit for pricing as we get into next year. You might see a little bit of pricing benefit getting into Q1 based on kind of how the cost price increases came in through '22, '23, but you will not see any impact or any benefit of pricing as we move out of our Q1 quarter.

So, you know, what does that mean? It means that as the pricing environment continues to normalize, structural unit growth is -- will essentially drive the majority of the overall top-line growth, and we expect Chewy to remain in share-gain position in 2024 as well.

Steve Zaccone -- Citi -- Analyst

OK. Understood. I do have a brief follow-up. So, the announcement around some of the cost savings, just to be clear, do you expect those savings to flow to the bottom line or will you need to reinvest those savings in other initiatives?

Sumit Singh -- Chief Executive Officer

Not need to. We will choose to reinvest. The answer is yes to both. Yes, some of that will flow to the bottom line, so we will drive leverage as a result of these actions, which we will quantify more when we talk to you about 2024 guidance.

And we will also prudently invest back in what we consider A-list priorities for the company that are poised for new customer acquisition and growth in the future.

Steve Zaccone -- Citi -- Analyst

OK. Thanks. See you next week.

Sumit Singh -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks. Maybe two broader ones. What are you seeing in the broader pet household market in the U.S. and Canada? Are there differences between the two? What about shelters and rescue adoption levels, bringbacks? Any color on the market for pet households? And then can you give us an update on your advertising initiatives and what you're seeing and doing there? Thank you.

Sumit Singh -- Chief Executive Officer

Hey, Brian. Lots of questions. Let's unpack them one by one. Broader pet household markets in the U.S.

and Canada, I talked about customer behavior through the holiday period, which is the most recent period that we were playing through. Similar participation rates. Canadian customers love the brand. The customer centricity, delivery experience, overall proposition, wow experiences, etc.

are resonating very loudly there. So, we're happy to see that. Differences that we're seeing, you know, slightly higher population of our mix of cat relative to dog. As a result, we're going to see, obviously, slightly lower AOVs.

Not a surprise. This is something that we knew going in, studying the Canadian market. We're happy to see the mix that is playing through right now. As we ramp -- continue to ramp up premium assortment that pushes through from Q4 into Q1, we're going to see that premium mix jump even more.

Also, not a surprise. So, overall, I would say broadly, and just so you know, we haven't yet turned on marketing in Canada. We're playing through some basic, you know, cold start marketing, as you would expect a start-up to do. And so, we're essentially actively learning the market as we do, you know, in a humble and curious manner.

But we're poised to receive the signals, and we like the signals that we're receiving right now. Number two, any trends. Adoptions are down 16% year over year, relinquishments are down 3% year over year. So, what that tells you is that broader trends of pet adoptions being down hasn't reversed.

At the same time, fewer pets were returned back to shelters to the tune of 3%. So, overall, you know, the trend hasn't broadly reversed. What else? Advertising -- update on advertising initiatives. We are pleased with the ramp.

We have essentially released more supply. Our commitment was to start ramping this up in the back half of this year, and we've ramped up incredibly. The gross margins, strong performance that we're -- that we are seeing. We didn't actively put this in the script.

It is a combination of the discipline from the team in execution and the two line items that are playing through are contribution of adds, as well as our work through supply chain and to logistics, where we're seeing a better benefit come through. So, overall, we're happy. Suppliers -- we're out in front of suppliers now as we, you know, get down into annual vendor negotiations. We're having good conversations, listening to the right type of feedback, and we're poised to ramp this up in 2024.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Got it. Thank you. Appreciate it.

Sumit Singh -- Chief Executive Officer

Sure. No problem. Thank you.

Operator

Our next question comes from Steve Forbes with Guggenheim. Please proceed.

Steve Forbes -- Guggenheim Partners -- Analyst

Good morning, Sumit, Stacy. Sumit, I wanted to start on pharmacy sales. You mentioned achieving $1 billion on an LTM basis. So, sort of a two-part question.

One, what was the growth rate during the quarter and sort of any context around gross margin benefit from that mix in isolation? And then two, I know, Sumit, we've talked in the past about share of pharmacy within your pharmacy customer base. What does that $1 billion represent in terms of share?

Sumit Singh -- Chief Executive Officer

Yeah. Steve, nice to hear from you. We will satisfy more of your curiosity next week when we see you at Investor Day. In terms of, you know, mix and gross margin, we -- obviously, you know, pharmacy delivers premium gross margins, as we've said in the past.

And essentially, what we saw in Q3 is pharmacy over-delivering through gross margin, offsetting all of the decline that we saw from the higher margin hard goods businesses, which are obviously slower given the discretionary pressures that we're seeing. So, for now, I'll give you -- I'll leave you with that qualitative commentary. And in terms of presenting CAGRs and growth rates and share positions, we will talk about that more next week.

Steve Forbes -- Guggenheim Partners -- Analyst

OK. And maybe just a quick follow-up, right, I think we noticed some shipping threshold changes during the quarter. I don't know if you can maybe just help frame to the group here, you know, why did you test lower threshold, sort of what drove you to that decision, and what its learnings informed you about that part of the value proposition in the current backdrop?

Sumit Singh -- Chief Executive Officer

Yeah. You know, it's all -- it's -- I like your framing, right, what did you learn because it is all part of our continuous test and learn in how to add more value from the platform into the customer. And there are a couple of ways you can add value. You can price discount brands transactionally.

And that, to us, sometimes becomes brand dilutive and you don't really drive, you know, recurring sort of behavior shifts. The other one is, you know, testing or lowering barriers for customers. And so, in this particular way, you know, we're testing if shipping across certain categories or certain classes or certain segments of customers, you know, is a barrier and how we essentially pass value directly back to the customer without -- while at the same time, protecting you know, our vendor partner brands, you know, that we've so proudly built on our platform. So, you know, this is something that you will continue to see from us.

You know, if we signal any broad shifts, we'll be transparent around that. For the most part, you know, we're liking, you know, some of the elasticity that we're seeing around seasonal trends. On others, you know, we've always been proud of the fact that customers build really healthy baskets with us. So, you know, what some other brands might feel as barriers, you know, are not always barriers when you interact with Chewy.

So, it's a healthy set of learnings that we're playing through.

Steve Forbes -- Guggenheim Partners -- Analyst

Thank you.

Operator

Our next question comes from Lee Horowitz with Deutsche Bank. Please proceed.

Lee Horowitz -- Deutsche Bank -- Analyst

Hi. Thanks for the question. A couple if I could. I guess with user pressures persisting longer than you guys would have thought entering the year, how do you get comfortable with the idea that Chewy can, in fact, grow users even if pet household formation remains under pressure for a sustained period of time? And then secondly, I know this is a topic that we'll dive deeper on next week, but can you comment at all on how CarePlus adoption or customer adoption rates have materialized in the back half of this year? And perhaps, how do you guys think about driving greater adoption of Chewy services broadly? Thanks so much.

Sumit Singh -- Chief Executive Officer

Sure. The second part of your question around CarePlus and driving services adoption, we will answer more holistically next week. We promise to bring you a really engaging and comprehensive update there. So, thank you for your patience on that.

On the first part of your question around how do we get comfortable with the idea that Chewy can still grow active customers? So, I will say two things. First of all, you know, we are a -- we're a young player, right? We are a 12-year-old company. So, we're obviously learning through a lot of these trends. But we have the benefit of having strategic relationships with our vendor partners who've played through the pet category for decades.

And so, when we sit with them and understand historical data, you know, times that the pet industry has been pressured and break down the components of pet growth, tonnage growth, ASP growth, etc., etc., you know, everything points to the fact that pet ultimately comes out resilient. Right now, pet household formation is muted, and it's muted because of the high kind of pressures that consumers are seeing from every direction. But it is expected that this will abate or no reason to believe why this will not abate. In fact, you know, in 2006 recession, or '06 to '08, you know, when overall CPG spending was down 2%, pet was actually up 6% during that time.

And, you know, there's this element of companionship that continues to play through. If you look at the last 10 years, premiumization has had a big impact. So, the humanization and premiumization trends are expected to continue. The difference in '06 versus -- 2006 to '08 versus now is that the level of inflations that are passed through the system have been unprecedented.

So, it's taking -- you know, recovery that usually takes four to six quarters has essentially taken a bit longer. But ultimately, it's expected to return back to normal levels. So, that's sort of one industry context. The second reason why we feel confident is because the structural value proposition that is fueled both by new customer acquisition but also growing share of wallet is highly, highly, you know, sound at Chewy.

The way that we acquire and then build baskets with you, the complementarity of features that we put on top of, you know, consumables and getting you into healthcare and then selling you an insurance and building your share of wallets, which, by the way, we will provide more intuition into next week when we see you for Investor Day, you know, allows us to sit back and evaluate the long-term trajectory of our consumer being highly recurring in nature and highly profit-contributing to the bottom line. So, I think with the two flywheels, the acquisition and the share of wallet growth, it provides us, you know, a defensible moat around models that primarily have either fixed subscription service on one side or that must acquire customers to continue delivering top-line algorithm growth.

Lee Horowitz -- Deutsche Bank -- Analyst

Helpful. Thank you so much.

Sumit Singh -- Chief Executive Officer

Sure.

Operator

Our last question today comes from Rupesh Parikh with Oppenheimer. Please proceed.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Good afternoon. Thanks for taking our question. So, just going back to Canada, your commentary there was very upbeat. Just any surprises thus far in terms of how that launch is going?

Sumit Singh -- Chief Executive Officer

It's a very good question. You know, our surprises are always around how could we have moved faster? So, no particular surprises. It's just, you know, learnings that we sort of internally ramp up to ourselves. You know, how can we move faster, expanding regions? How do we double down on ramping more assortment up? How do we understand consumer behavior better? So, it's just all of those areas that we're focused on.

I would say all the right things per se. But it's a good one. I'll give the surprise a little more thought and perhaps we can talk next week when we see each other great.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Great. Thank you.

Operator

Thank you for your question.

Sumit Singh -- Chief Executive Officer

We really appreciate your time, and we hope to see you all next week. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jen Hsu -- Vice President and Head of Investor Relations

Sumit Singh -- Chief Executive Officer

Stacy Bowman -- Interim Chief Financial Officer

Eric Sheridan -- Goldman Sachs -- Analyst

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Nathan Feather -- Morgan Stanley -- Analyst

Anna Andreeva -- Needham and Company -- Analyst

Rick Patel -- Raymond James -- Analyst

Steve Zaccone -- Citi -- Analyst

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Steve Forbes -- Guggenheim Partners -- Analyst

Lee Horowitz -- Deutsche Bank -- Analyst

Rupesh Parikh -- Oppenheimer and Company -- Analyst

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