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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-38936
CHEWYLOGOAPPROVED.JPG
CHEWY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
90-1020167
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1855 Griffin Road, Suite B-428
,
Dania Beach
,
Florida
 
33004
(Address of principal executive offices)
 
(Zip Code)
(786) 320-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.01 per share
CHWY
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).    Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Class
 
Outstanding as of December 2, 2019
Class A Common Stock, $0.01 par value per share
 
53,475,000
Class B Common Stock, $0.01 par value per share
 
345,125,000

CHEWY, INC.
FORM 10-Q
For the Quarterly Period Ended November 3, 2019

TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
1
 
1
 
2
 
3
 
5
 
6
Item 2.
15
Item 3.
24
Item 4.
24
 
 
Item 1.
25
Item 1A.
25
Item 6.
25
 
26



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning our ability to:
•
sustain our recent growth rates and manage our growth effectively;
•
acquire new customers in a cost-effective manner and increase our net sales per active customer;
•
accurately predict economic conditions and their impact on consumer spending patterns, particularly in the pet products market, and accurately forecast net sales and appropriately plan our expenses in the future;
•
introduce new products or offerings and improve existing products;
•
successfully compete in the pet products and services retail industry, especially in the e-commerce sector;
•
source additional, or strengthen our existing relationships with, suppliers;
•
negotiate acceptable pricing and other terms with third-party service providers, suppliers and outsourcing partners and maintain our relationships with such entities;
•
optimize, operate and manage the expansion of the capacity of our fulfillment centers;
•
provide our customers with a cost-effective platform that is able to respond and adapt to rapid changes in technology;
•
maintain adequate cybersecurity with respect to our systems and ensure that our third-party service providers do the same with respect to their systems;
•
successfully manufacture and sell our own private brand products;
•
maintain consumer confidence in the safety and quality of our vendor-supplied and private brand food products and hardgood products;
•
comply with existing or future laws and regulations in a cost-efficient manner;
•
attract, develop, motivate and retain well-qualified employees; and
•
adequately protect our intellectual property rights and successfully defend ourselves against any intellectual property infringement claims or other allegations that we may be subject to.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.






The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

Investors and others should note that we may announce material financial information to our investors using our investor relations website (https://investor.chewy.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
CHEWY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 
As of
 
November 3,
2019
 
February 3,
2019
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
135,871

 
$
88,331

Accounts receivable
94,087

 
48,738

Inventories
289,935

 
220,855

Due from Parent, net
11,764

 
78,712

Prepaid expenses and other current assets
34,557

 
11,949

Total current assets
566,214

 
448,585

Property and equipment, net
107,703

 
91,691

Operating lease right-of-use assets
181,035

 
—

Other non-current assets
3,735

 
1,346

Total assets
$
858,687

 
$
541,622

Liabilities and stockholders’ deficit
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
637,687

 
$
502,880

Accrued expenses and other current liabilities
373,744

 
311,150

Total current liabilities
1,011,431

 
814,030

Operating lease liabilities
202,621

 
—

Other long-term liabilities
34,092

 
63,534

Total liabilities
1,248,144

 
877,564

Commitments and contingencies (Note 4)

 

Stockholders’ deficit:
 
 
 
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding as of November 3, 2019; no shares authorized, issued or outstanding as of February 3, 2019
—

 
—

Class A common stock, $0.01 par value per share, 1,500,000,000 shares authorized, 53,475,000 shares issued and outstanding as of November 3, 2019; no shares authorized, issued or outstanding as of February 3, 2019
535

 
—

Class B common stock, $0.01 par value per share, 395,000,000 shares authorized, 345,125,000 shares issued and outstanding as of November 3, 2019; no shares authorized, issued or outstanding as of February 3, 2019
3,451

 
—

Voting common stock, $0.01 par value per share, no shares authorized, issued or outstanding as of November 3, 2019; 1,000 shares authorized, 100 shares issued and outstanding as of February 3, 2019
—

 
—

Additional paid-in capital
1,390,089

 
1,256,160

Accumulated deficit
(1,783,532
)
 
(1,592,102
)
Total stockholders’ deficit
(389,457
)
 
(335,942
)
Total liabilities and stockholders’ deficit
$
858,687

 
$
541,622

See accompanying Notes to Condensed Consolidated Financial Statements.



1


CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

 
13 Weeks Ended
 
39 Weeks Ended
 
November 3,
2019
 
October 28,
2018
 
November 3,
2019
 
October 28,
2018
Net sales
$
1,229,801

 
$
875,630

 
$
3,492,218

 
$
2,444,679

Cost of goods sold
938,021

 
703,589

 
2,674,313

 
1,956,774

Gross profit
291,780

 
172,041

 
817,905

 
487,905

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
258,488

 
150,375

 
684,948

 
413,275

Advertising and marketing
112,071

 
100,163

 
325,086

 
276,087

Total operating expenses
370,559

 
250,538

 
1,010,034

 
689,362

Loss from operations
(78,779
)
 
(78,497
)
 
(192,129
)
 
(201,457
)
Interest (expense) income, net
(221
)
 
(121
)
 
699

 
(90
)
Loss before income tax provision
(79,000
)
 
(78,618
)
 
(191,430
)
 
(201,547
)
Income tax provision
—

 
—

 
—

 
—

Net loss
$
(79,000
)
 
$
(78,618
)
 
$
(191,430
)
 
$
(201,547
)
 
 
 
 
 
 
 
 
Net loss per share attributable to common Class A and Class B stockholders, basic and diluted
$
(0.20
)
 
$
(0.20
)
 
$
(0.48
)
 
$
(0.51
)
Weighted average common shares used in computing net loss per share attributable to common Class A and Class B stockholders, basic and diluted
401,317

 
393,000

 
397,235

 
393,000

See accompanying Notes to Condensed Consolidated Financial Statements.



2


CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)

 
13 Weeks Ended November 3, 2019
 
Class A and Class B Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
Shares
 
 Amount
 
 
 
Balance as of August 4, 2019
398,600

 
$
3,986

 
$
1,338,813

 
$
(1,704,532
)
 
$
(361,733
)
Issuance of common stock upon initial public offering, net of underwriting discounts, commissions and offering costs
—

 
—

 
(235
)
 
—

 
(235
)
Share-based compensation expense
—

 
—

 
39,348

 
—

 
39,348

Contribution from Parent
—

 
—

 
325

 
—

 
325

Tax sharing agreement with Parent
—

 
—

 
11,838

 
—

 
11,838

Net loss
—

 
—

 
—

 
(79,000
)
 
(79,000
)
Balance as of November 3, 2019
398,600

 
$
3,986

 
$
1,390,089

 
$
(1,783,532
)
 
$
(389,457
)
 
 
 
 
 
 
 
 
 
 
 
13 Weeks Ended October 28, 2018
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
Shares
 
 Amount
 
 
 
Balance as of July 29, 2018
—

 
$
—

 
$
1,248,477

 
$
(1,447,141
)
 
$
(198,664
)
Share-based compensation expense
—

 
—

 
3,229

 
—

 
3,229

Contribution from Parent
—

 
—

 
325

 
—

 
325

Net loss
—

 
—

 
—

 
(78,618
)
 
(78,618
)
Balance as of October 28, 2018
—

 
$
—

 
$
1,252,031

 
$
(1,525,759
)
 
$
(273,728
)
See accompanying Notes to Condensed Consolidated Financial Statements.


3


CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)


 
39 Weeks Ended November 3, 2019
 
Class A and Class B Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
Shares
 
 Amount
 
 
 
Balance as of February 3, 2019
—

 
$
—

 
$
1,256,160

 
$
(1,592,102
)
 
$
(335,942
)
Issuance of common stock upon initial public offering, net of underwriting discounts, commissions and offering costs
5,600

 
56

 
110,293

 
—

 
110,349

Change in capital structure
393,000

 
3,930

 
(3,930
)
 
—

 
—

Share-based compensation expense
—

 
—

 
90,361

 
—

 
90,361

Contribution from Parent
—

 
—

 
975

 
—

 
975

Tax sharing agreement with Parent
—

 
—

 
15,740

 
—

 
15,740

Termination of loan from Parent
—

 
—

 
(79,510
)
 
—

 
(79,510
)
Net loss
—

 
—

 
—

 
(191,430
)
 
(191,430
)
Balance as of November 3, 2019
398,600

 
$
3,986

 
$
1,390,089

 
$
(1,783,532
)
 
$
(389,457
)
 
 
 
 
 
 
 
 
 
 
 
39 Weeks Ended October 28, 2018
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
Shares
 
 Amount
 
 
 
Balance as of January 28, 2018
—

 
$
—

 
$
1,240,509

 
$
(1,324,212
)
 
$
(83,703
)
Share-based compensation expense
—

 
—

 
10,547

 
—

 
10,547

Contribution from Parent
—

 
—

 
975

 
—

 
975

Net loss
—

 
—

 
—

 
(201,547
)
 
(201,547
)
Balance as of October 28, 2018
—

 
$
—

 
$
1,252,031

 
$
(1,525,759
)
 
$
(273,728
)
See accompanying Notes to Condensed Consolidated Financial Statements.

4


CHEWY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
39 Weeks Ended
 
November 3,
2019
 
October 28,
2018
Cash flows from operating activities
 
 
 
Net loss
$
(191,430
)
 
$
(201,547
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
22,716

 
16,385

Share-based compensation expense
90,361

 
10,547

Non-cash lease expense
13,571

 
—

Amortization of deferred rent
—

 
7,630

Other
2,075

 
506

Net change in operating assets and liabilities:
 
 
 
Accounts receivable
(45,348
)
 
(3,779
)
Inventories
(69,081
)
 
(52,454
)
Prepaid expenses and other current assets
(25,619
)
 
(4,237
)
Other non-current assets
(2,397
)
 
797

Trade accounts payable
134,807

 
90,034

Accrued expenses and other current liabilities
46,899

 
35,853

Operating lease liabilities
(6,006
)
 
—

Other long-term liabilities
1,699

 
7,888

Net cash used in operating activities
(27,753
)
 
(92,377
)
Cash flows from investing activities
 
 
 
Capital expenditures
(38,539
)
 
(36,330
)
Cash advances provided to Parent
(50,888
)
 
(115,602
)
Cash reimbursements of advances provided to Parent
39,568

 
175,745

Net cash (used in) provided by investing activities
(49,859
)
 
23,813

Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of underwriting discounts, commissions and offering costs
110,576

 
—

Proceeds from tax sharing agreement with Parent
14,500

 
—

Payment of debt issuance costs
(781
)
 
—

Contribution from Parent
975

 
975

Principal repayments of finance lease obligations
(118
)
 
(10
)
Net cash provided by financing activities
125,152

 
965

Net increase (decrease) in cash and cash equivalents
47,540

 
(67,599
)
Cash and cash equivalents, as of beginning of period
88,331

 
68,767

Cash and cash equivalents, as of end of period
$
135,871

 
$
1,168

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Assets acquired in exchange for new operating lease liabilities
$
29,429

 
$
—

See accompanying Notes to Condensed Consolidated Financial Statements.

5


CHEWY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Description of Business and Basis of Presentation

Description of Business

Chewy, Inc. and its wholly-owned subsidiaries (collectively “Chewy” or the “Company”) is a pure play e-commerce business geared toward pet products for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy serves its customers through its retail website, www.chewy.com, and its mobile applications and focuses on delivering exceptional customer service, a large selection of high-quality pet food, treats and supplies, and pet healthcare products; price, convenience (including Chewy’s Autoship subscription program), fast shipping, and hassle-free returns.

PetSmart Acquisition

On May 31, 2017, the Company was acquired by PetSmart, Inc. (“PetSmart” or the “Parent”), a leading specialty provider of products, services and solutions for the lifetime needs of pets. This change-in-control event is referred to as the “PetSmart Acquisition”. PetSmart is wholly-owned by a consortium including private investment funds advised by BC Partners, La Caisse de dépôt et placement du Québec, affiliates of GIC Special Investments Pte Ltd, affiliates of StepStone Group LP and funds advised by Longview Asset Management, LLC (collectively, the “Sponsors”), and controlled by affiliates of BC Partners.

Initial Public Offering

On June 18, 2019, the Company closed its initial public offering (“IPO”), in which it issued and sold 5.6 million shares of its Class A common stock. The price at IPO was $22.00 per share. The Company received net proceeds of approximately $110.3 million from the IPO after deducting underwriting discounts and commissions of $6.2 million and offering costs.

Prior to the completion of the IPO, the Company amended and restated its certificate of incorporation to authorize Class A and Class B common stock and reclassify the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock. In connection with the IPO, 47,875,000 shares of the Company’s Class B common stock were reclassified into shares of Class A common stock on a one-to-one basis. Upon completion of the IPO, 53,475,000 shares of the Company’s Class A common stock and 345,125,000 shares of Class B common stock were outstanding. The Class A common stock outstanding includes the shares issued in the IPO.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes include the accounts of Chewy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements and notes thereto of Chewy, Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”) accounting standards codification. In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the quarterly period ended November 3, 2019 are not necessarily indicative of the results for the entire fiscal year. The unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2019 (“10-Q Report”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 17, 2019 (the “Prospectus”).

Fiscal Year

The Company has a 52 or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Sunday that is closest to the last day of the last month of the quarter.


6


2.
Summary of Significant Accounting Policies

Other than policies noted within Recent Accounting Pronouncements below, there have been no significant changes from the significant accounting policies disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in the Prospectus.

Use of Estimates

GAAP requires management to make certain estimates, judgments, and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments. Actual results could differ from those estimates.

Key estimates relate primarily to determining the net realizable value and demand for inventory, useful lives associated with property and equipment, valuation allowances with respect to deferred tax assets, contingencies and the valuation and assumptions underlying share-based compensation. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

ASU 2016-02, Leases. In February 2016, the FASB issued this Accounting Standards Update (“ASU”) to provide a comprehensive lease accounting model that requires lessees to recognize lease liabilities and corresponding right-of-use assets for most leases. The new guidance also changes the definition of a lease and requires enhanced disclosures of pertinent quantitative and qualitative information about an entity’s leasing activities. The FASB subsequently issued ASU 2018-10 allowing entities to initially apply ASU 2016-02 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. These ASUs became effective at the beginning of the Company’s 2019 fiscal year. The Company adopted this ASU by applying the new guidance to new and existing leases effective February 4, 2019, with no restatement of comparative periods. The Company elected the package of practical expedients, which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also made an accounting policy election to not recognize right-of-use assets and lease liabilities arising from short-term leases on its condensed consolidated balance sheets. The adoption of this ASU did not result in a cumulative effect adjustment to accumulated deficit. Upon adoption, the Company recognized operating lease right-of-use assets of $162.8 million and operating lease liabilities of $193.6 million. The adoption of this new guidance did not have a material net impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows.

The Company has operating and finance lease agreements for its fulfillment and customer service centers, corporate offices, and certain equipment. The Company determines if an arrangement contains a lease at inception based on the ability to control a physically distinct asset. Operating and finance lease right-of-use assets are recorded in the condensed consolidated balance sheets based on the initial measurement of the lease liability as adjusted to include prepaid rent and initial direct costs less any lease incentives received. Lease liabilities are measured at the commencement date based on the present value of the lease payments over the lease term. Lease payments are generally fixed but may include provisions for future rent increases based on a market index. The Company separately accounts for lease and non-lease components within lease agreements; the non-lease components primarily relate to common area maintenance for real estate leases. The Company uses its incremental borrowing rate to present value the lease liability as key inputs to determine the interest rate implicit in the lease are not shared by lessors.

Operating lease expense is recorded on a straight-line basis over the lease term. Right-of-use assets and lease liabilities for short-term leases are not recognized in the condensed consolidated balance sheets. Payments for short-term leases are recognized in the condensed consolidated statements of operations on a straight-line basis over the lease term.




7


ASU 2018-07, Stock Compensation; Improvements to Nonemployee Share-Based Payment Accounting. In June 2018, the FASB issued this ASU to expand the scope of Topic 718, Compensation-Stock Compensation to include share-based payment awards to be issued to non-employees in exchange for acquiring goods and services. The ASU aligned the accounting for awards issued to non-employees to be similar to employee awards. This update became effective at the beginning of the Company’s 2019 fiscal year. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements

ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. In August 2018, the FASB issued this ASU to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective at the beginning of the Company’s 2020 fiscal year. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated financial statements and disclosures.

3.
Accrued Expenses and Other Current Liabilities

The following table presents the components of accrued expenses and other current liabilities (in thousands):

 
As of
 
November 3,
2019
 
February 3,
2019
Outbound fulfillment
$
163,057

 
$
147,610

Advertising and marketing
105,208

 
85,421

Accrued expenses and other
105,479

 
78,119

Total accrued expenses and other current liabilities
$
373,744

 
$
311,150



4.
Commitments and Contingencies

As of November 3, 2019, there were no material changes to the Company’s advertising and services purchase commitments and legal matters disclosed in Note 5 of the “Notes to Consolidated Financial Statements” included in the Prospectus.

5.
Debt

ABL Credit Facility

On June 18, 2019, the Company entered into a new five-year senior secured asset-backed credit facility (the “ABL Credit Facility”) which provides for non-amortizing revolving loans in an aggregate principal amount of up to $300 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $100 million, subject to customary conditions.

Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, either a base rate or a LIBOR rate. The applicable margin is generally determined based on the average excess liquidity during the immediately preceding fiscal quarter as a percentage of the maximum borrowing amount under the ABL Credit Facility, and is between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. The Company is also required to a pay commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility.

All obligations under the ABL Credit Facility are guaranteed on a senior secured first-lien basis by the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions, and secured, subject to permitted liens and other exceptions, by a perfected first-priority security interest in substantially all of the Company’s and its wholly-owned domestic subsidiaries’ assets.

8



The ABL Credit Facility contains a number of covenants that, among other things, restrict the Company’s and its restricted subsidiaries’ ability to:

•incur or guarantee additional debt and issue certain equity securities;
•make certain investments and acquisitions;
•make certain restricted payments and payments of certain indebtedness;
•incur certain liens or permit them to exist;
•enter into certain types of transactions with affiliates;
•merge or consolidate with another company; and
•transfer, sell or otherwise dispose of assets.

Each of these restrictions is subject to various exceptions.

In addition, the ABL Credit Facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the facility is less than the greater of 10% of the maximum borrowing amount and $30 million for a certain period of time. The ABL Credit Facility also contains certain customary affirmative covenants and events of default for facilities of this type, including an event of default upon a change in control. As of November 3, 2019, the Company had no outstanding borrowings under the ABL Credit Facility.

6.
Leases

The Company leases all of its fulfillment and customer service centers and corporate offices under non-cancelable operating lease agreements. The terms of the Company’s real estate leases generally range from 5 to 15 years and typically allow for the leases to be renewed for up to three additional five-year terms. Fulfillment and customer service centers and corporate office leases, including exercised renewal options, expire at various dates through 2031. The Company also leases certain equipment under operating and finance leases. The terms of equipment leases generally range from 3 to 5 years and do not contain renewal options. These leases expire at various dates through 2024.

The Company’s finance leases as of November 3, 2019 were not material. The table below presents the operating lease-related assets and liabilities recorded on the condensed consolidated balance sheets (in thousands):

Leases
 
Balance Sheet Classification
 
As of November 3, 2019
Assets
 
 
 
 
Operating
 
Operating lease right-of-use assets
 
$
181,035

Total operating lease assets
 
 
 
$
181,035

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Accrued expenses and other current liabilities
 
$
14,451

Non-current
 
 
 
 
Operating
 
Operating lease liabilities
 
202,621

Total operating lease liabilities
 
 
 
$
217,072



Lease expense primarily related to operating lease costs. Lease expense for the thirteen and thirty-nine weeks ended November 3, 2019 was $12.3 million and $35.2 million, respectively, of which short-term and variable lease payments were $2.1 million and $6.1 million, respectively, and were included within selling, general and administrative expenses in the condensed consolidated statements of operations.

As of November 3, 2019, the weighted-average remaining lease term and weighted-average discount rate for operating leases was 11.6 years and 11.3%, respectively.

Operating cash flows related to cash paid for operating leases were approximately $27.4 million for the thirty-nine weeks ended November 3, 2019.

9



The table below presents the maturity of lease liabilities as of November 3, 2019 (in thousands):
 
Operating Leases
Remainder of 2019
$
5,585

2020
38,753

2021
37,429

2022
35,137

2023
30,580

Thereafter
260,391

Total lease payments
407,875

Less: interest
190,803

Present value of lease liabilities
$
217,072


The table above includes all locations for which the Company had the right to control the use of the property. In addition, as of November 3, 2019 the Company had lease arrangements which had not yet commenced with total future lease payments of approximately $115 million. The lease terms for these lease arrangements are approximately 16 years.

7.
Capital Stock

Common Stock

Prior to the completion of the IPO, the Company amended and restated its certificate of incorporation to authorize Class A and Class B common stock and reclassify the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock. In connection with the IPO, 47,875,000 shares of the Company’s Class B common stock were reclassified into shares of Class A common stock on a one-to-one basis. Upon completion of the IPO, 53,475,000 shares of the Company’s Class A common stock and 345,125,000 shares of Class B common stock were outstanding.

Voting Rights

Holders of the Company’s Class A and Class B common stock are entitled to vote together as a single class on all matters submitted to a vote or for the consent of the stockholders of the Company, unless otherwise required by law or the Company’s amended and restated certificate of incorporation. Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to ten votes per share.

Dividends

Subject to the preferences applicable to any series of preferred stock, if any, outstanding, holders of Class A and Class B common stock are entitled to share equally, on a per share basis, in dividends and other distributions of cash, property or securities of the Company.

Liquidation

Subject to the preferences applicable to any series of preferred stock, if any, outstanding, in the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Company, all assets of the Company available for distribution to common stockholders would be divided among and paid ratably to holders of Class A and Class B common stock.

Conversion of Class B Common Stock

Voluntary Conversion

Each share of Class B common stock is convertible into one fully paid and nonassessable share of Class A Common Stock at the option of the holder thereof with the prior written consent of the Company.



10



Automatic Conversion

All shares of Class B common stock shall automatically, without further action by any holder, be converted into an identical number of shares of fully paid and nonassessable Class A common stock (i) on the first trading day on or after the date on which the outstanding shares of Class B common stock constitute less than 7.5% of the aggregate number of shares of common stock then outstanding, or (ii) upon the occurrence of an event, specified by the affirmative vote (or written consent) of the holders of a majority of the then-outstanding shares Class B common stock, voting as a separate class.

In addition, each share of Class B common stock will convert automatically into one share of Class A common stock (i) upon the sale or transfer of such share of Class B common stock, except for certain transfers described in the Company’s amended and restated certificate of incorporation, including transfers to affiliates of the holder and another holder of Class B common stock, or (ii) if the holder is not an affiliate of any of the Sponsors.

Preferred Stock

Preferred stock may be issued from time to time by the Company for such consideration as may be fixed by the board of directors. Except as otherwise required by law, holders of any series of Preferred Stock shall be entitled to only such voting rights, if any, as shall expressly be granted by the Company’s amended and restated certificate of incorporation.

8.
Share-Based Compensation

2019 Omnibus Incentive Plan

In June 2019, the Company’s board of directors adopted and approved the 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on June 13, 2019 and allows for the issuance of up to 31,864,865 shares of Class A common stock. No awards may be granted under the 2019 Plan after June 2029.

The 2019 Plan provides for the grant of stock options, including incentive stock options, non-qualified stock options, restricted stock, dividend equivalents, stock payments, restricted stock units (“RSUs”), performance shares, other incentive awards, stock appreciation rights, and cash awards (collectively “awards”). The awards may be granted to the Company’s employees, consultants, and directors, and the employees and consultants of the Company’s affiliates and subsidiaries.

RSUs

In connection with the consummation of the IPO, the Company granted RSUs under the 2019 Plan. Certain of these RSUs vest upon satisfaction of both a service-based vesting condition (the “Service Condition”) and a performance-based vesting condition (the “Share Price Condition”) as described below.

The Service Condition will be satisfied with respect to 25% of an employee’s RSUs on the first anniversary of the 2019 Plan’s registration date and then with respect to 12.5% of an employee’s RSUs at the end of each six month period thereafter, subject to the employee’s continued employment with the Company through the applicable vesting date.

The Share Price Condition shall be satisfied with respect to a percentage of an employee’s RSUs, as and when the price per share of Class A common stock specified (each, a “Share Price Hurdle”) is achieved, on a volume adjusted weighted-average basis, on every trading day during a consecutive 45-trading day period completed prior to the fifth anniversary of the 2019 Plan’s effective date subject to the employee’s continued employment with the Company through the applicable vesting date.


11


RSU Activity

The following table summarizes the activity related to the Company’s RSUs for the thirty-nine weeks ended November 3, 2019 (in thousands, except for weighted average grant date fair value):
 
Number of RSUs
 
Weighted Average Grant Date Fair Value
Outstanding as of February 3, 2019
—

 
$
—

Granted
25,892

 
36.58

Vested
(2,717
)
 
36.85

Forfeited
(2,266
)
 
36.73

Unvested and outstanding as of November 3, 2019
20,909

 
$
36.57



The total fair value of RSUs that vested during the thirty-nine weeks ended November 3, 2019 was $101.5 million. As of November 3, 2019, total unrecognized compensation expense related to unvested RSUs was $224.0 million and is expected to be recognized over a weighted-average expected performance period of 2.0 years.

The fair value of the RSUs with share price hurdles was determined on the date of grant using a Monte Carlo model to simulate total stockholder return for the Company and peer companies with the following assumptions:

Performance period
5 years
Weighted-average risk-free interest rate
1.8%
Weighted-average volatility
49.7%
Weighted-average dividend yield
—%


The risk-free interest rate utilized is based on a 5-year term-matched zero-coupon U.S. Treasury security yield at the time of grant. Expected volatility is based on historical volatility of the stock of the Company’s peer firms. 

As of November 3, 2019, there were 8.2 million additional shares of Class A common stock reserved for future issuance under the 2019 Plan.

Citrus Profits Interest Plan

Subsequent to the PetSmart Acquisition, the Company’s share-based compensation included profits interests units (“PIUs”) granted by Citrus Intermediate Holdings L.P. (the “Citrus Partnership”), a Delaware limited partnership (the “Citrus Profits Interest Plan”). The Citrus Partnership is a parent company of PetSmart and a wholly-owned subsidiary of the Sponsors. The Company recognizes share-based compensation as equity contributions from the Citrus Partnership in its condensed consolidated financial statements for awards granted under the Citrus Profits Interest Plan as it relates to grantees’ services as employees of the Company.

As of June 13, 2019, an aggregate of 768,785 profits interests units under the Citrus Profits Interest Plan were held by employees of Chewy, Inc. and were canceled.














12


Share-Based Compensation Expense

Share-based compensation expense is included within selling, general and administrative expenses in the condensed consolidated statements of operations. The Company recognized share-based compensation expense as follows (in thousands):

 
13 Weeks Ended
 
39 Weeks Ended
 
November 3,
2019
 
October 28,
2018
 
November 3,
2019
 
October 28,
2018
RSUs
$
39,348

 
$
—

 
$
80,196

 
$
—

PIUs
—

 
3,229

 
10,165

 
10,547

Total share-based compensation expense
$
39,348

 
$
3,229

 
$
90,361

 
$
10,547



9.
Income Taxes

Subsequent to the PetSmart Acquisition, the Company’s losses were included with PetSmart’s consolidated U.S. federal and state income tax returns. Income taxes as presented in the Company’s condensed consolidated financial statements have been prepared on the separate return method as if the Company were a taxpayer separate from PetSmart.

The Company did not have a net current or deferred provision for income taxes for any taxing jurisdiction during the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018.

Concurrent with the IPO, the Company and PetSmart entered into a tax sharing agreement which governs the respective rights, responsibilities, and obligations of the Company and PetSmart with respect to tax matters, including taxes attributable to PetSmart, entitlement to refunds, allocation of tax attributes, preparation of tax returns, certain tax elections, control of tax contests and other tax matters regarding U.S. federal, state, local, and foreign income taxes.

10.
Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders is presented using the two class method required for participating securities. Under the two class method, net loss attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings for the periods presented are calculated as net loss less distributed earnings.

Basic and diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average shares outstanding during the period. The weighted-average shares outstanding during the periods presented reflects the reclassification of the 100 outstanding shares of common stock into 393,000,000 shares of Class B common stock.

For the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018, the Company’s basic and diluted net loss per share attributable to common Class A and Class B stockholders are the same because the Company has generated a net loss to common stockholders and common stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact.

11.
Certain Relationships and Related Party Transactions

The Company’s condensed consolidated financial statements include management fee expenses of $0.3 million and $1.0 million allocated to the Company by the Sponsors and the Parent for organizational oversight and certain limited corporate functions for the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018, respectively. Allocated costs are included within selling, general and administrative expenses in the condensed consolidated statements of operations.

From time to time, prior to the completion of the IPO, the Company used funding from or provided funding to the Parent, as needed, in the normal course of business. The Company and PetSmart were parties to an intercompany loan agreement pursuant to which each party made loans from time to time to the other. In connection with the signing of an underwriting agreement pursuant to which the Company received substantially all of the net proceeds from the Company’s sale of shares of Class A common stock as part of the IPO, the loan agreement was terminated without cash repayment of the outstanding loan. The termination of the intercompany loan resulted in a $79.5 million reduction of the Company’s due from Parent balance during the thirty-nine weeks ended November 3, 2019.


13


Certain of the Company’s pharmacy operations are currently, and have been since launch on July 2, 2018, conducted through a wholly-owned subsidiary of PetSmart. The Company has entered into a services agreement with PetSmart that provides for the payment of a management fee due from PetSmart with respect to this arrangement. The Company recognized $9.9 million and $31.4 million within net sales in the condensed consolidated statement of operations for the services provided during the thirteen and thirty-nine weeks ended November 3, 2019. The services agreement will remain in place for so long as the Company conducts any pharmacy operations through a PetSmart subsidiary. 

In connection with the IPO, the Company was released from its obligations under the Parent’s asset-backed revolving credit facility in accordance with its terms.

PetSmart Guarantees

PetSmart currently provides a guarantee of payment with respect to certain equipment and other leases that the Company has entered into and serves as a guarantor in respect of the Company’s obligations under a credit insurance policy in favor of certain of the Company’s current or future suppliers.


14


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2019 (“10-Q Report”) and our final prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 17, 2019 (the “Prospectus”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections herein, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Chewy,” “the Company,” “we,” “our,” or “us” refer to Chewy, Inc. and its consolidated subsidiaries. 

Investors and others should note that we may announce material financial information to our investors using our investor relations website (https://investor.chewy.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.

Overview

We are the largest pure-play pet e-tailer in the United States, offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and around-the-clock convenience that only e-commerce can offer. We believe that we are the preeminent online destination for pet parents as a result of our broad selection of high-quality products, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and continually develop innovative ways for our customers to engage with us. We partner with more than 1,800 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 55,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.

Fiscal Year End

We have a 52 or 53-week fiscal year ending each year on the Sunday that is closest to January 31 of that fiscal year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Sunday that is closest to the last day of the last month of the quarter.

Initial Public Offering

On June 13, 2019, our registration statement on Form S-1 to our initial public offering (“IPO”) was declared effective by the SEC, and our common stock began trading on the New York Stock Exchange (“NYSE”) on June 14, 2019. Our IPO closed on June 18, 2019. For additional information, see Note 1 to our condensed consolidated financial statements included in Part I, Item 1 included in this 10-Q Report.















15



Key Financial and Operating Data

We measure our business using both financial and operating data and use the following metrics and measures to assess the near-term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
 
13 Weeks Ended
 
 
 
39 Weeks Ended
 
 
(in thousands, except net sales per active customer and percentages)
November 3,
2019
 
October 28,
2018
 
% Change
 
November 3,
2019
 
October 28,
2018
 
% Change
Financial and Operating Data
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,229,801

 
$
875,630

 
40.4
 %
 
$
3,492,218

 
$
2,444,679

 
42.8
%
Net loss
$
(79,000
)
 
$
(78,618
)
 
(0.5
)%
 
$
(191,430
)
 
$
(201,547
)
 
5.0
%
Adjusted EBITDA(1)
$
(30,228
)
 
$
(68,634
)
 
56.0
 %
 
$
(75,177
)
 
$
(173,550
)
 
56.7
%
Adjusted EBITDA margin(1)
(2.5
)%
 
(7.8
)%
 
 
 
(2.2
)%
 
(7.1
)%
 
 
Net cash provided by (used in) operating activities
$
1,581

 
$
(43,172
)
 
103.7
 %
 
$
(27,753
)
 
$
(92,377
)
 
70.0
%
Free cash flow(1)
$
(12,794
)
 
$
(51,306
)
 
75.1
 %
 
$
(66,292
)
 
$
(128,707
)
 
48.5
%
Active customers
12,723

 
9,578

 
32.8
 %
 
12,723

 
$
9,578

 
32.8
%
Net sales per active customer
$
360

 
$
323

 
11.4
 %
 
$
360

 
$
323

 
11.4
%
Autoship customer sales
$
865,190

 
$
579,949

 
49.2
 %
 
$
2,408,661

 
$
1,595,819

 
50.9
%
Autoship customer sales as a percentage of net sales
70.4
 %
 
66.2
 %
 
 
 
69.0
 %
 
65.3
 %
 
 
(1) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this
10-Q Report adjusted EBITDA, a non-GAAP financial measure that we calculate as net loss excluding depreciation and amortization; share-based compensation expense; income tax provision; interest income (expense), net; management fee expense; transaction and other costs. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this 10-Q Report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

We believe it is useful to exclude non-cash charges, such as depreciation and amortization, share-based compensation expense and management fee expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; and transaction and other costs as these items are not components of our core business operations. Adjusted EBITDA has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;
•
adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy;
•
adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;

16


•
adjusted EBITDA does not reflect transaction and other costs which are generally incremental costs that result from an actual or planned transaction and include transaction costs (i.e. IPO costs), integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and
•
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated.

($ in thousands, except percentages)
13 Weeks Ended
 
39 Weeks Ended
Reconciliation of Net Loss to Adjusted EBITDA
November 3,
2019
 
October 28,
2018
 
November 3,
2019
 
October 28,
2018
Net loss
$
(79,000
)
 
$
(78,618
)
 
$
(191,430
)
 
$
(201,547
)
Add (deduct):
 
 
 
 
 
 
 
Depreciation and amortization
8,137

 
6,309

 
22,716

 
16,385

Share-based compensation expense
39,348

 
3,229

 
90,361

 
10,547

Interest expense (income), net
221

 
121

 
(699
)
 
90

Management fee expense(1)
325

 
325

 
975

 
975

Transaction related costs
—

 
—

 
1,396

 
—

Other
741

 
—

 
1,504

 
—

Adjusted EBITDA
$
(30,228
)
 
$
(68,634
)
 
$
(75,177
)
 
$
(173,550
)
Net sales
$
1,229,801

 
$
875,630

 
$
3,492,218

 
$
2,444,679

Adjusted EBITDA margin
(2.5
)%
 
(7.8
)%
 
(2.2
)%
 
(7.1
)%
(1) Management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions. Although we are not a party to the agreement governing the management fee, this management fee is reflected as an expense in our condensed consolidated financial statements.

We define adjusted EBITDA margin as adjusted EBITDA divided by net sales.

Free Cash Flow

To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this 10-Q Report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less capital expenditures (which consist of purchases of property and equipment, including servers and networking equipment, capitalization of labor related to our website, mobile applications, and software development, and leasehold improvements). We have provided a reconciliation below of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure.

We have included free cash flow in this 10-Q Report because it is an important indicator of our liquidity as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Free cash flow has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, capital expenditures and our other GAAP results.


17


The following table presents a reconciliation of net cash provided by (used in) operating activities to free cash flow for each of the periods indicated.

($ in thousands)
13 Weeks Ended
 
39 Weeks Ended
Reconciliation of Net Cash Provided by (Used in) Operating Activities to Free Cash Flow
November 3,
2019
 
October 28,
2018
 
November 3,
2019
 
October 28,
2018
Net cash provided by (used in) operating activities
$
1,581

 
$
(43,172
)
 
$
(27,753
)
 
$
(92,377
)
Deduct:
 
 
 
 
 
 
 
Capital expenditures
(14,375
)
 
(8,134
)
 
(38,539
)
 
(36,330
)
Free Cash Flow
$
(12,794
)
 
$
(51,306
)
 
$
(66,292
)
 
$
(128,707
)

Free cash flow may be affected in the near to medium term by the timing of capital investments (such as the launch of new fulfillment centers, customer service centers, and corporate offices and purchases of IT and other equipment), fluctuations in our growth and the effect of such fluctuations on working capital, and changes in our cash conversion cycle due to increases or decreases of vendor payment terms as well as inventory turnover.

Key Operating Metrics

Active Customers

As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered, and for whom an order has shipped, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as a key indicator of our growth—acquisition and retention of customers—as a result of our marketing efforts and the value we provide to our customers. The number of active customers has grown over time as we acquired new customers and retained previously acquired customers.

Net Sales Per Active Customer

We define net sales per active customer as the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior.

Autoship and Autoship Customer Sales

We define Autoship customers as customers in a given fiscal quarter for whom an order has shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers), for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.

Autoship Customer Sales as a Percentage of Net Sales

We define Autoship customer sales as a percentage of net sales as the Autoship customer sales in a given reporting period divided by the net sales from all orders in that period. We view Autoship customer sales as a percentage of net sales as a key indicator of our recurring sales and customer retention.


18


Components of Results of Consolidated Operations

Net Sales

We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program.

We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.

Cost of Goods Sold

Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.

Selling, General and Administrative

Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs.

Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.

Advertising and Marketing

Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.

Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest earned on cash and cash equivalents held by us. Additionally, we recognize interest expense related to commitment fees and may recognize interest expense in connection with future borrowings under the new five-year senior secured asset-backed credit facility (the “ABL Credit Facility”). See “Other Liquidity Measures-ABL Credit Facility.”

Income Tax Provision

Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions.










19


Results of Consolidated Operations

The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
 
13 Weeks Ended
 
39 Weeks Ended
 
 
 
 
 
 
 
% of net sales
 
 
 
 
 
 
 
% of net sales
($ in thousands)
November 3,
2019
 
October 28,
2018
 
% Change
 
November 3,
2019
 
October 28,
2018
 
November 3,
2019
 
October 28,
2018
 
% Change
 
November 3,
2019
 
October 28,
2018
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,229,801

 
$
875,630

 
40.4
 %
 
100.0
 %
 
100.0
 %
 
$
3,492,218

 
$
2,444,679

 
42.8
%
 
100.0
 %
 
100.0
 %
Cost of goods sold
938,021

 
703,589

 
33.3
 %
 
76.3
 %
 
80.4
 %
 
2,674,313

 
1,956,774

 
36.7
%
 
76.6
 %
 
80.0
 %
Gross profit
291,780

 
172,041

 
69.6
 %
 
23.7
 %
 
19.6
 %
 
817,905

 
487,905

 
67.6
%
 
23.4
 %
 
20.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
258,488

 
150,375

 
71.9
 %
 
21.0
 %
 
17.2
 %
 
684,948

 
413,275

 
65.7
%
 
19.6
 %
 
16.9
 %
Advertising and marketing
112,071

 
100,163

 
11.9
 %
 
9.1
 %
 
11.4
 %
 
325,086

 
276,087

 
17.7
%
 
9.3
 %
 
11.3
 %
Total operating expenses
370,559

 
250,538

 
47.9
 %
 
30.1
 %
 
28.6
 %
 
1,010,034

 
689,362

 
46.5
%
 
28.9
 %
 
28.2
 %
Loss from operations
(78,779
)
 
(78,497
)
 
(0.4
)%
 
(6.4
)%
 
(9.0
)%
 
(192,129
)
 
(201,457
)
 
4.6
%
 
(5.5
)%
 
(8.2
)%
Interest (expense) income, net
(221
)
 
(121
)
 
(82.6
)%
 
—
 %
 
—
 %
 
699

 
(90
)
 
876.7
%
 
—
 %
 
—
 %
Loss before income tax provision
(79,000
)
 
(78,618
)
 
(0.5
)%
 
(6.4
)%
 
(9.0
)%
 
(191,430
)
 
(201,547
)
 
5.0
%
 
(5.5
)%
 
(8.2
)%
Income tax provision
—

 
—

 
—
 %
 
—
 %
 
—
 %
 
—

 
—

 
—
%
 
—
 %
 
—
 %
Net loss
$
(79,000
)
 
$
(78,618
)
 
(0.5
)%
 
(6.4
)%
 
(9.0
)%
 
$
(191,430
)
 
$
(201,547
)
 
5.0
%
 
(5.5
)%
 
(8.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen and Thirty-Nine Weeks Ended November 3, 2019 Compared to Thirteen and Thirty-Nine Weeks Ended October 28, 2018

Net Sales

 
13 Weeks Ended (1)
 
 
 
 
 
39 Weeks Ended (1)
 
 
 
 
($ in thousands)
November 3,
2019
 
October 28,
2018
 
$ Change
 
% Change
 
November 3,
2019
 
October 28,
2018
 
$ Change
 
% Change
Consumables
$
910,893

 
$
679,162

 
$
231,731

 
34.1
%
 
$
2,600,410

 
$
1,886,021

 
$
714,389

 
37.9
%
Hardgoods
172,022

 
133,584

 
38,438

 
28.8
%
 
512,769

 
385,717

 
127,052

 
32.9
%
Other
146,886

 
62,884

 
84,002

 
133.6
%
 
379,039

 
172,941

 
206,098

 
119.2
%
Net sales
$
1,229,801

 
$
875,630

 
$
354,171

 
40.4
%
 
$
3,492,218

 
$
2,444,679

 
$
1,047,539

 
42.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Prior periods have been reclassified to conform with current presentation.

Net sales for the thirteen weeks ended November 3, 2019 increased by $354.2 million, or 40.4%, to $1.2 billion compared to $875.6 million for the thirteen weeks ended October 28, 2018. This increase was primarily due to growth in our customer base, with the number of active customers increasing by 3.1 million, or 32.8%, and increased spending among our active customers with net sales per active customer increasing $37, or 11.4%, in the thirteen weeks ended November 3, 2019 compared to the thirteen weeks ended October 28, 2018, driven by catalog expansion and growth in our healthcare and private brand businesses.

Net sales for the thirty-nine weeks ended November 3, 2019 increased by $1.0 billion, or 42.8%, to $3.5 billion compared to $2.4 billion for the thirty-nine weeks ended October 28, 2018. This increase was primarily due to growth in our customer base, with the number of active customers increasing by 3.1 million, or 32.8%, and increased spending among our active customers with net sales per active customer increasing $37, or 11.4%, in the thirty-nine weeks ended November 3, 2019 compared to the thirty-nine weeks ended October 28, 2018, driven by catalog expansion and growth in our healthcare and private brand businesses.


20


Cost of Goods Sold and Gross Profit

Cost of goods sold for the thirteen weeks ended November 3, 2019 increased by $234.4 million, or 33.3%, to $938.0 million compared to $703.6 million in the thirteen weeks ended October 28, 2018. This increase was primarily due to a 38.2% increase in orders shipped and associated product costs, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in orders on a percentage basis, primarily as a result of realized supply chain efficiencies and cost reduction initiatives.

Cost of goods sold for the thirty-nine weeks ended November 3, 2019 increased by $717.5 million, or 36.7%, to $2.7 billion compared to $2.0 billion in the thirty-nine weeks ended October 28, 2018. This increase was primarily due to a 40.6% increase in orders shipped and associated product costs, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in orders on a percentage basis, primarily as a result of realized supply chain efficiencies and cost reduction initiatives.

Gross profit for the thirteen weeks ended November 3, 2019 increased by $119.7 million, or 69.6%, to $291.8 million compared to $172.0 million in the thirteen weeks ended October 28, 2018. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirteen weeks ended November 3, 2019 increased by 410 basis points compared to the thirteen weeks ended October 28, 2018, primarily due to margin expansion across all verticals, including improvements in margin profile of pharmacy and private brands.

Gross profit for the thirty-nine weeks ended November 3, 2019 increased by $330.0 million, or 67.6%, to $817.9 million compared to $487.9 million in the thirty-nine weeks ended October 28, 2018. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for the thirty-nine weeks ended November 3, 2019 increased by 340 basis points compared to the thirty-nine weeks ended October 28, 2018, primarily due to margin expansion across all verticals, including improvements in margin profile of pharmacy and private brands.

Selling, General and Administrative

Selling, general and administrative expenses for the thirteen weeks ended November 3, 2019 increased by $108.1 million, or 71.9%, to $258.5 million compared to $150.4 million in the thirteen weeks ended October 28, 2018. This increase was primarily due to an increase of $39.6 million in fulfillment costs largely attributable to increased investments to support overall growth of our business, including the opening of a new fulfillment center and growth of fulfillment and customer service headcount. We also expanded our corporate office and increased headcount as a result of business growth, resulting in an increase in compensation and facilities expense and other general and administrative items of $68.5 million, including investments in security and data protection software and an increase of $36.1 million in non-cash share-based compensation expense.

Selling, general and administrative expenses for the thirty-nine weeks ended November 3, 2019 increased by $271.7 million, or 65.7%, to $684.9 million compared to $413.3 million in the thirty-nine weeks ended October 28, 2018. This increase was primarily due to an increase of $106.4 million in fulfillment costs largely attributable to increased investments to support overall growth of our business, including the opening of a new fulfillment center and growth of fulfillment and customer service headcount. We also expanded our corporate office and increased headcount as a result of business growth and also in contemplation of becoming a public company, resulting in an increase in compensation and facilities expense and other general and administrative items of $165.3 million, including investments in security and data protection software and an increase of $79.8 million in non-cash share-based compensation expense.

Advertising and Marketing

Advertising and marketing expenses for the thirteen weeks ended November 3, 2019 increased by $11.9 million, or 11.9%, to $112.1 million compared to $100.2 million in the thirteen weeks ended October 28, 2018, but overall spend declined as a percentage of net sales to 9.1% from 11.4% in the thirteen weeks ended October 28, 2018. This increase in advertising and marketing spend through existing channels contributed to an increase in the number of active customers of 3.1 million.

Advertising and marketing expenses for the thirty-nine weeks ended November 3, 2019 increased by $49.0 million, or 17.7%, to $325.1 million compared to $276.1 million in the thirty-nine weeks ended October 28, 2018, but overall spend declined as a percentage of net sales to 9.3% from 11.3% in the thirty-nine weeks ended October 28, 2018. This increase in advertising and marketing spend through existing channels contributed to an increase in the number of active customers of 3.1 million.


21


Interest Income (Expense), Net
Interest expense, net for the thirteen weeks ended November 3, 2019 increased by $0.1 million compared to the thirteen weeks ended October 28, 2018 primarily due to interest expense related to commitment fees on our ABL Credit Facility
Interest income, net for the thirty-nine weeks ended November 3, 2019 increased by $0.8 million, compared to the thirty-nine weeks ended October 28, 2018 primarily due to intercompany interest income on net amounts due from Parent, partially offset by interest expense related to commitment fees on our ABL Credit Facility.

Income Tax Provision

Income tax provision was zero for the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018 as we maintained a full valuation allowance against our net deferred tax assets.

Liquidity and Capital Resources

Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible redeemable preferred stock and cash flows generated by operations. Our principal sources of liquidity are expected to be our cash and cash equivalents and our new revolving credit facility. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds. Cash and cash equivalents totaled $135.9 million as of November 3, 2019, an increase of $47.5 million from February 3, 2019.

We believe that our cash and cash equivalents and availability under our new revolving credit facility will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors” in our Prospectus. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.

Cash Flows
 
39 Weeks Ended
 
November 3,
2019
 
October 28,
2018
Net cash used in operating activities
$
(27,753
)
 
$
(92,377
)
Net cash (used in) provided by investing activities
$
(49,859
)
 
$
23,813

Net cash provided by financing activities
$
125,152

 
$
965

Operating Activities
Cash provided by (used in) operating activities consisted of net loss adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and certain other non-cash items, as well as the effect of changes in working capital and other activities.

Net cash used in operating activities was $27.8 million for the thirty-nine weeks ended November 3, 2019, primarily consisting of $191.4 million of net loss, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of $22.7 million and $90.4 million of share-based compensation expense, partially offset by a $41.7 million decrease in cash consumed by working capital primarily driven by an increase in our current liabilities, partially offset by an increase in our current assets.

Net cash used in operating activities was $92.4 million for the thirty-nine weeks ended October 28, 2018, primarily consisting of $201.5 million of net loss, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of $16.4 million and $10.5 million of share-based compensation expense, as well as a $65.4 million decrease in cash consumed by working capital primarily driven by an increase in our current liabilities, partially offset by an increase in our current assets.



22


Investing Activities

Our primary investing activities consisted of purchases of property and equipment, mainly for the launch and expansion of our fulfillment capabilities, as well as purchases of servers and networking equipment, and leasehold improvements.

Net cash used in investing activities was $49.9 million for the thirty-nine weeks ended November 3, 2019, primarily consisting of $38.5 million of capital expenditures related to the launch of a new fulfillment center, the expansion of corporate and customer services offices, and additional investments in IT hardware and software, and $11.3 million of cash advances, net of reimbursements from PetSmart. Net cash provided by investing activities was $23.8 million for the thirty-nine weeks ended October 28, 2018, primarily consisting of $60.1 million of cash reimbursements, net of advances from PetSmart, partially offset by $36.3 million of costs related to the launch of new fulfillment centers, the expansion of corporate and customer service offices, and additional investments in IT hardware and software.

Financing Activities

Net cash provided by financing activities was $125.2 million for the thirty-nine weeks ended November 3, 2019 primarily consisting of $110.6 million of proceeds from our IPO, net of underwriting discounts, commissions and offering costs and $14.5 million of proceeds from the tax sharing agreement with PetSmart. Net cash provided by financing activities was $1.0 million for the thirty-nine weeks ended October 28, 2018, primarily consisting of a management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions.

Other Liquidity Measures

ABL Credit Facility

On June 18, 2019, we entered into the ABL Credit Facility which provides for non-amortizing revolving loans in an aggregate principal amount of up to $300 million, subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to $100 million, subject to customary conditions.

Borrowings under the ABL Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at our option, either a base rate or a LIBOR rate. The applicable margin is generally determined based on the average excess liquidity during the immediately preceding fiscal quarter as a percentage of the maximum borrowing amount under the ABL Credit Facility, and is between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. We are also required to a pay commitment fee of between 0.25% and 0.375% with respect to the undrawn portion of the commitments, which is generally based on average daily usage of the facility.

All obligations under the ABL Credit Facility are guaranteed on a senior secured first-lien basis by the our wholly-owned domestic subsidiaries, subject to certain exceptions, and secured, subject to permitted liens and other exceptions, by a perfected first-priority security interest in substantially all of our and our wholly-owned domestic subsidiaries’ assets.

The ABL Credit Facility contains a number of covenants that, among other things, restrict our and our restricted subsidiaries’ ability to:

•incur or guarantee additional debt and issue certain equity securities;
•make certain investments and acquisitions;
•make certain restricted payments and payments of certain indebtedness;
•incur certain liens or permit them to exist;
•enter into certain types of transactions with affiliates;
•merge or consolidate with another company; and
•transfer, sell or otherwise dispose of assets.

Each of these restrictions is subject to various exceptions.





23


In addition, the ABL Credit Facility requires us to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the facility is less than the greater of 10% of the maximum borrowing amount and $30.0 million for a certain period of time. The ABL Credit Facility also contains certain customary affirmative covenants and events of default for facilities of this type, including an event of default upon a change in control. As of November 3, 2019, we had no outstanding borrowings under the ABL Credit Facility.

Contractual Obligations

There have been no material changes to our contractual obligations as compared to those described in Contractual Obligations included in Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Prospectus, except as disclosed in Note 4 in the “Notes to Condensed Consolidated Financial Statements” of this10-Q Report.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is included in Note 2 in the “Notes to Condensed Consolidated Financial Statements” of this10-Q Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Quantitative and Qualitative Disclosures About Market Risk” of our Prospectus. Our exposures to market risk have not changed materially since February 3, 2019.

Item 4. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this 10-Q Report, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of November 3, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the thirteen weeks ended November 3, 2019.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.



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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our prospectus, dated June 13, 2019 and filed with the SEC on June 17, 2019 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

Item 6. Exhibits
 
 
Exhibit No.
Exhibit Description
31.1
31.2
32.1
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CHEWY, INC.
 
 
 
 
Date:
December 9, 2019
By:
/s/ Sumit Singh
 
 
 
Sumit Singh
 
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
December 9, 2019
By:
/s/ Mario Marte
 
 
 
Mario Marte
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)


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