Chewy CEO: 'We took incremental share' in the pet industry in Q3

Chewy CEO Sumit Singh joins Yahoo Finance Live to discuss earnings, demand in the pet industry, supply chains, margins, and taking share from competitors.

Video transcript

- Wall Street analysts are wagging their tails happily after digging through Chewy's latest quarter. Chewy's results are getting high marks for margin expansion and increase in active customers and more people using the company's auto ship service. Let's dig into the results with chewy CEO Sumit Singh in this exclusive Yahoo Finance interview.

Sumit, good to see you. It has been a while. We were talking earlier on in the show. We were surprised by the market's reaction here. You ticked a lot of boxes, notably with margin expansion and improved active customers just growing sequentially. Are you surprised by this market reaction? Brian, nice to be here. Nice to see you again.

SUMIT SINGH: Market reaction is always an interesting one to predict. So we try not to focus too much on market reaction and squarely focus on controllable elements, which is execution, taking care of customers, taking care of team members, and delivering results, which obviously takes care of shareholders at that point. So we're happy with the outcome.

- Well, we did see a reversal here. In the pre-market, the stock was down. Now it's up here, I guess as people really dig into your results. And you talked a lot about, Sumit, last night the resilience of your customer base. Take us through where you're seeing that because the economy has really slowed.

SUMIT SINGH: Yeah. So you're seeing basically what we've believed always. Pet is an emotive category. We form tight bonds with our pets. We treat them like family. And when it comes to macroeconomic pressure points, you don't treat family any differently. So from that point of view, the resiliency that we've believed in is essentially shining through. And on top of that, Chewy continues to deliver results in forming new bonds and retaining and developing former ones.

What we're seeing in terms of consumer mindset is non-discretionary categories, particularly consumables and health care, have remained resilient. And it's discretionary categories such as hard goods or probably sometimes treats that weigh in that trading decision that consumers make during a time of inflation. I will say one more thing. When you consider that 83% of our net sales weighted went through consumables and health care, it just speaks to the value proposition amplification on the resiliency point. You combine that with the market and the customer mindset, it just puts us in a really nice position to be here.

- Hey, Sumit, it's Julie. I also want to ask you about your input costs because I did notice you had a better gross margin than analysts had been anticipating. And you talked a lot on the call about your fulfillment centers and kind of efficiencies there. But I'm also-- which we can dig into in a minute, but I'm also curious about input costs, if you are seeing them moderate.

SUMIT SINGH: Yeah. So we saw input costs-- we did not see more input costs come through in Q3. We basically carried through Q2 costs into Q3. What we did find, to our positive surprise, was that pricing was extremely resilient as we move through the quarter. And so any price cost moderation that may have been expected, we actually did not see. In fact, we saw positivity without a loss of unit demand.

In fact, Julie, when you look at Q2, what we had said was a bunch of our net sales was driven-- price was a contributor and unit was lesser of a contributor driving sales. In Q3, we said units and price contributed equally, which essentially implies that unit volume accelerated as we moved through Q3. Plus we did not give up any of the leadership position on price. As a result, the 14 and 1/2% year over year growth on net sales and gross margins that were 200 basis points higher, of course, helped with our work on supply chain logistics transformation there.

- Sumit, I'll touch the third rail here. Not only did you have a good quarter, I mean, a lot of your competitors had a really good third quarter as well. Why this ongoing strength in the industry?

SUMIT SINGH: First of all, we continue to pull away. So I think what you're seeing here is if you look at the overall pet market, the pet market was up roughly 10% non-pharma. Chewy was up 13 and 1/2%. So we, clearly-- I mean, we're a premium to the market. And we took incremental share. But I think it goes back to the part about pets being resilient.

And you're coming off of a Q2 lull that was heavy on travel and customers, freshly coming out of the pandemic, spending much more on services than retail and travel. And as Q3, customers kind of prepare their mindset for the holiday season. But at the same time, life has kind of resumed to normalcy and you get back to engaging with categories you prefer to engage with. And so that's probably lifting all boats. But, clearly, as the tide rises, Chewy's outperforming the market and the overall industry.

- What's happened in all these pets with this vacation boom? I don't know if the answer to that, Sumit. I mean, it just occurred to me while you were speaking, like, everybody's going on vacation right now. We always have to scramble to find a home for Sparky because we don't like to board him. But that's not part of your portfolio at this time, is it, Sumit?

SUMIT SINGH: Not yet. But our mission statement is to be the most trusted convenient destination for pet parents and partners everywhere. And for us to be a credible destination, it's only a matter of time when we connect the [INAUDIBLE] to the non-health care services, which is essentially boarding, grooming, verticals that you're talking about.

- So I'll bring them to your house the next time that we go away, Sumit, OK. I'll drop Sparky off. Chewy CEO Sumit Singh. As we always do, we like to show a little video of our pets too when you come on with us, some of whom I know are happy clients of yours. We just discovered today one of our colleagues has a little bird--

- That's amazing.

- --which is in the center there, Sumit.

- That is really cool, guys.

SUMIT SINGH: That is awesome.

- We have quite a portfolio here. And also, there's a little baby Elmo in those pictures as a human, just to avoid confusion. Sumit Singh, the CEO of Chewy, thank you so much for being here. We appreciate it.

SUMIT SINGH: Thank you too. Really appreciate it.