Chewy, Inc. (NYSE: CHWY) Q4 2020 earnings call dated Mar. 30, 2021
Corporate Participants:
Robert LaFleur — Vice President of Investor Relations and Capital Markets
Sumit Singh — Chief Executive Officer and Director
Mario Marte — Chief Financial Officer
Analysts:
Nat Schindler — BofA Securities — Analyst
Brian Fitzgerald — Wells Fargo — Analyst
Stephanie Wissink — Jefferies — Analyst
Katie — JP Morgan — Analyst
Oliver Wintermantel — Evercore — Analyst
Seth Basham — Wedbush — Analyst
Robert Friedner — Piper Sandler & Co. — Analyst
Lauren Schenk — Morgan Stanley — Analyst
Presentation:
Operator
Good afternoon and welcome to the Chewy Fourth Quarter and Full Year 2020 Results Call. [Operator Instructions]
I would now like to turn the conference over to Robert LaFleur, President of Investor Relations. Please go ahead.
Robert LaFleur — Vice President of Investor Relations and Capital Markets
Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal 2020. Joining me today are Chewy’s CEO, Sumit Singh and CFO, Mario Marte.
Our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today have been posted to the Investor Relations section of our website investor.chewy.com. A link to the webcast of today’s conference call is also available on our site.
On our call today, we will be making forward-looking statements, including statements concerning Chewy’s future prospects financial results, business strategies, industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers other facilities, customer service operations and future plans. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance.
Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements except as required by law. For further information, please refer to the risk factors and other information in Chewy’s 10-K and 8-K filed earlier today and in our other filings with the SEC.
Also during this call we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measurements are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today and in our 10-K. These non-GAAP measures are not intended as a substitute for GAAP results. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will also be included on our IR website shortly.
I’d now like to turn the call over to Sumit.
Sumit Singh — Chief Executive Officer and Director
Thanks, Bob. And thanks to all of you for joining us on the call. As we gathered for this call a year ago, we were just beginning to realize the scope of the COVID pandemic. Looking back, I’m incredibly proud of the way utopians [Phonetic] came together to execute through this incredibly challenging year.
As a leadership team, we communicated frequently and honestly about how we would navigate the pandemic with our team members’ safety in the forefront. We made sure our teams have safe and healthy workspaces and implemented new team member friendly policies and benefits. In response, our teams redoubled their dedication to our customers and made sure that their pets received the vital products and care that they needed.
In the face of surging volume, we kept our supply chains operating and our fulfillment centers or FCs open. Our corporate staff and customer service teams quickly adapted to working from home and our tech and product teams solved challenge after challenge to seamlessly foster that transition.
Despite the disruptions caused by COVID and in some cases because of that, we accelerated the rollout of several strategic initiatives including the launch of eGift Cards and personalized products, the introduction of service innovations like our telehealth offering, Connect with a Vet and compounding services and the opening of our first automated and first high velocity fulfillment centers. These accelerated rollouts speak to the adaptability and the innovative spirit of our entire Chewy team.
And even with the backdrop, our teams remained relentlessly focused on the strong execution required to deliver a superior customer experience to over 19 million pet parents who trusted us to deliver on that promise. It is for all these reasons that 2020 will go down as a landmark year in Chewy’s history.
Over the next few minutes I will briefly discuss our Q4 and FY 2020 results. I will then use the balance of my remarks to outline our long-term vision for Chewy and why we believe this vision leaves us well positioned for long-term sales and profitability growth. After that I will turn the call over to Mario to discuss our fourth quarter and full year 2020 results in greater detail, as well as our first quarter and full year 2021 guidance.
Q4 net sales increased 50.8% year-over-year to $2.04 billion, bringing 2020 full-year net sales to $7.15 billion or 47.4% annual growth. Exceeding $2 billion of quarterly net sales is another milestone for us. It took us 7.5 years to reach our first billion-dollar quarter and only two years to reach the $2 billion quarterly sales mark. Active customer growth and continued strength in purchasing behavior were key drivers of Q4 and full year 2020 momentum.
During Q4, our new customer acquisition pace accelerated relative to Q3. Customer reactivations increased by 40% and customer retention improved by 240 basis points. As a result, we added 1.4 million net active customers in the fourth quarter and ended the year with 19.2 million active customers.
As we have shared with you in the past, efficiently adding new customers to our platform and then growing their share of wallet is a key part of our growth strategy. For the full year we added 5.7 million net active customers, reflecting a 42.7% annual growth. The customer cohorts we acquired in 2020 were highly engaged and displayed similar, and in some cases, stronger purchase and repurchase behavior compared to legacy cohorts. These positive behaviors were driven by a wider product assortment and by a growing set of customer offerings such as gift cards, personalized products, compounding services and Connect with a Vet.
Assessing our progress by business verticals, we are pleased to note that our core consumables business remained strong and we continue to gain traction in hardgood, healthcare and proprietary brand. Looking at the Q4 trends within our key verticals, third-party hardgoods sales grew 40% faster than the business overall and proprietary brand hardgoods sales more than doubled year-over-year. Further within hardgoods, our proprietary brand penetration increased 570 basis points year-over-year to reach 21%, continuing the share gains we have reported throughout the year. These results provide us confidence that we are on the right track and that there is a lot of opportunity in front of us to continue winning customers’ hearts and minds in these areas.
Now let’s review our margin performance. We are encouraged to see our effort to increase customer lifetime value or LTV drive higher margins. Fourth quarter gross margin expanded 300 basis points year-over-year to 27.1%. Full year 2020 gross margin was 25.5%, up 190 basis points versus 2019 and a record high on a full year basis.
Approximately half of our Q4 gross margin improvement came from structural and sustainable drivers like higher penetration rate into higher margin verticals like hardgoods, proprietary brands and healthcare. Notably, on a year-over-year basis, we executed a 510 basis point mix shift out of lower margin consumables and into higher margin verticals like healthcare and hardgoods. Higher gross margins and rigorous focus on bottom line execution translated into another quarter of positive EBITDA.
Fourth quarter adjusted EBITDA was $60.8 million translating to adjusted EBITDA margin of 3%, a 340 basis point improvement year-over-year. For the full year, adjusted EBITDA was $85.2 million and adjusted EBITDA margin improved 290 basis points to 1.2%. Both Q4 and full year 2020 adjusted EBITDA includes a $15.9 million benefit from releasing a prior tax reserve. And even if you back out this one-time tailwind, we generated $150 million more in adjusted EBITDA in 2020 than we did in 2019, demonstrating our ability to successfully scale the business and drive incremental profitability.
Our performance and dynamics of this past year have provided us with an advanced look at Chewy’s future. We believe that our future is bright given the size of the opportunity in front of us and our relentless focus. Moving forward, we plan on executing against this opportunity in order to realize even greater scale and improved profitability. I will focus the balance of my remarks today outlining the scale of the large and growing opportunity in front of us and in sharing with you the ways we intend to meet the challenge of realizing it.
Let’s start with three important trends and why we believe Chewy is well prepared to capitalize on that. First is the increase in the number of pet-owning households. Pet adoption surge in 2020 has millions of people sought out comfort, companionship and the joy of pet parenthood. According to industry analysts, the number of pet-owning households increased by 5.7% in 2020, a significant acceleration from the pre-pandemic five-year CAGAR of 0.6%.
Looking at our own data, it is clear to us that these new pet parents are joining us early in their journey. For example, in 2020 we observed a 35% year-over-year increase in the creation of pet profiles for puppies and kittens and a 40% increase in the creation of profiles for newly-adopted pets. We get excited about these insights because that newly-adopted Chewy puppy is going to grow up, eat more food and shred more toys, leading to a long-lasting relationship with us resulting in a stream of recurring revenue for years to come. Understanding our customers and anticipating their wants and needs help us create sustainable advantages to win in the pet space.
The second trend is the size of the US pet market opportunity and our ability to expand the competitive playing field. Today we compete in roughly 70% of the $100 billion US pet market and we do so primarily in the areas of food supplies and prescription drugs and diet. That leaves us with an additional $30 billion opportunity in healthcare and services to grow into and we are confident in our vision and our ability to do so.
Equally exciting to note is that we are continuing to increase our penetration into a growing US pet market that is expected to reach $120 billion by 2024. At $7 billion in net sales, Chewy is clearly only scratching the surface of the overall market opportunity in front of us.
And finally, the third tenant is growing e-commerce penetration within the US pet market. Online penetration rate in the retail food and supplies category are estimated to have grown from 7% in 2015 to 30% in 2020 and are expected to reach 53% by 2025, which is in line with the current online penetration rates of categories like books and electronics.
Further, as we are observing healthcare and services have already begun to shift online and we believe this trend will continue and accelerate. Equally importantly, we believe these shifts in favor of e-commerce channels are durable and largely permanent. This is where we believe Chewy has won and will continue to win for years to come. Years of preparation and focus have positioned us as the Internet preeminent neighborhood pet store and a leading pure play e-commerce company in the pet space. We look forward to a future marked by ongoing innovation winning customer hearts and minds and growing market share. Overall, we see 2020 and the impact of COVID as much more than a one-time growth accelerator. We see the past year as a catalyst that sped up a secular shift towards e-commerce that was already underway.
There are multiple growth vectors ahead of us, which make the market opportunity so compelling and moving forward, we plan to continue following the growth and margin expansion roadmap that we have used since our IPO. That roadmap consists of the following. Acquire new customers, increase share of wallet for existing customers, expand assortment, grow proprietary brands and healthcare offering, loaunch services, and when the time is right, expand the business outside of the US. As we continue to successfully execute in each of these areas, we will also continue to invest wisely to grow our base of recurring revenues, scale our operating expenses and drive profitable growth over the long term.
Let’s look at how our efforts are translating into tangible results. Increased wallet share is a truly powerful growth catalyst. We captured 12% more initial wallet share from our 2020 new customer cohort than we did from their 2019 predecessors and we accomplished this while absorbing our largest new customer cohorts ever. An additional data point with lends us confidence that our efforts are delivering results is the fact that year one contribution profit per customer, which we calculate as gross profit less variable costs, has increased at an average annual rate of 16% over the past two years. Reiterating what I mentioned earlier in my comment, these gains across share of wallet and profitability are being realized as a direct result of our efforts and reflect the impact of catalog extension, improved discoverability and the incremental contributions from high-margin verticals like healthcare, hardgoods and proprietary brand.
In the past three years, we have nearly doubled our total SKU count, including executing a seven-fold increase in higher margin proprietary brand SKUs. Within healthcare we are unlocking value for ourselves, our customers and our partners in this large and growing $35 billion market opportunity. You will likely recall that we recently launched two services in the healthcare space, Connect With a Vet and compounding. In 2020, these services were live just for a few months. But in 2021 we will get full 12 months of financial benefit these services provide as well as vital knowledge that we continue to accumulate as we operate and refine these businesses.
In the year ahead and beyond, we will remain focused on expanding our customer base. Sustained improvement in customer LTV continued to support our strategy of disciplined investing in advertising and marketing. As we quickly and efficiently convert new customers into engaged active customers, our growing customer base in turn generates the profit that we then reinvest into acquiring even more customers, thereby completing the flywheel effect that drive both topline and bottom-line growth.
Additionally, we expect to continue leveraging SG&A. Along the way, we may choose to make incremental investments to strengthen our employee value proposition. However, our playbook shows us offsetting these investments over time with efficiencies from the technology and productivity enhancements that we began implementing in 2020. We are confident that these investments will drive long-term growth and profitability.
More specifically, in 2021 we will invest approximately $60 million in higher wages and benefits, the bulk of which will be directed to our fulfillment and customer service team. This investment is necessary to help us attract and retain team members, drive higher employee engagement and increase productivity over time. At the same time, we expect to see productivity gains accelerate in 2021 from the technology and automation investments we have made in our fulfillment center network. You may recall that in October 2020, we opened our first fully automated FC. A month earlier than that, we began realizing a different style of efficiency when we opened our first limited catalog high-velocity FC. Given their launch timing, these FCs provided only modest ramp benefit to us in fiscal 2020. In 2021, we expect to realize accelerated productivity gains from their full-year operations.
We also expect to open our second automated fulfillment center in Q2 2021 in Kansas City and another limited catalog facility in Q3 2021. Additionally, in 2022 we will begin automation retrofits at select fulfillment centers. We will keep you apprised of the specific timing of these events on our upcoming calls. We believe these investments in our people and automation are not only prudent, but they also have the potential to drive step function changes in our variable cost structure and contribute meaningfully to effective SG&A leverage.
Finally, I would like to share that having achieved our first full year of positive adjusted EBITDA in 2020 and our first quarter of positive net income in Q4, we have taken a meaningful step forward on our path to profitability and in demonstrating our ability to get big fast and get fit fast. Going forward, our margins may fluctuate quarter to quarter, but we believe our profit trajectory is clear and positive.
I will end my comments by reiterating that 2020 was an incredibly challenging and unpredictable year for all of us. During this time Chewy performed exceptionally well and made significant strategic and operational progress. We navigated the safety concerns of the pandemic and kept delivering for our pet parents and business partners. We proactively grew our market share by offering a large level of service to the millions of new customers who adopted pets during the pandemic.
Further, we capitalized on the accelerated and sustainable shift of consumer to e-commerce channels. As a result, we grew our customer base by 43% and ended the year with 19.2 million active customers. Perhaps most importantly we dramatically increased our market size by launching new services in the pet health and wellness space. These expanded offerings, help us create additional customers and improve our ability to increase wallet share with our existing customers. We are entering 2021 with significant momentum and we are confident in our ability to deliver.
With that I will turn the call over to Mario. Mario?
Mario Marte — Chief Financial Officer
Thank you, Sumit. We knew that 2020 holiday season will be unprecedented and we prepared for a range of outcomes. The season got off to an early and strong start and market conditions remained favorable throughout the balance of the quarter. Fourth quarter net sales were $2.04 billion, reflecting 50.8% year-over-year growth. This brought full-year 2020 net sales to $7.15 billion, a $2.3 billion or 47.4% increase year-over-year. Along with accelerated customer growth, we also saw sustained high levels of customer engagement as traffic and conversion metrics improved from December into January reversing their typical seasonal pattern. Pricing and promotions are usually a reflection of the broader market environment and both remained balanced and stable throughout the quarter. This allowed us to maintain pricing integrity and lower the volume of promotional discounts offered.
Looking at customer cohort behavior, the positive trends we saw earlier in 2020 continued through the fourth quarter. Engagement levels remained high and basket size and re-order trends remained favorable, which led to a 12% increase in Q4 average spend per new customer versus the Q4 2019 cohort.
Closing out the fourth quarter topline discussion, Autoship net sales represented 68.2% of total net sales and net sales per active customer or NSPAC increased to $372. This represents a sequential growth of $9 or 2.5% and year-over-year growth of $12 or 3.3%. NSPAC growth accelerated this quarter as the mechanics of the NSPAC calculation begin to reflect the positive revenue impact of the millions of customers who joined the platform in 2020. As is our usual reminder, net sales per active customer reflects trailing four quarter net sales divided by the number of active customers at the end of the quarter. It’s also worth noting that we no longer need to adjust our year-over-year NSPAC comparisons for the extra week in 2018 as Q4 2018 has now aged out of the comp period.
Moving down the financials. Fourth quarter gross margin was 27.1%, a year-over-year increase of 300 basis points and a high watermark for the Company to date. For the full year gross margin came in at 25.5%, up 190 basis points versus 2019, continuing to drive towards incremental annual gross margin improvement.
As Sumit mentioned, approximately half of the 300 basis point improvement in gross margin came from sustainable structural drivers like the improved mix into higher margin verticals like hardgoods, proprietary brands and healthcare as well as increased scale benefits. The remainder came from pricing stability and then more restrained promotional environment.
Turning now to operating expenses. Fourth quarter operating expenses, which include SG&A and advertising and marketing, were $532.6 million or 26.1% of net sales, scaling 250 basis points year-over-year. For the full-year operating expenses were $1.91 billion or 26.7% of net sales, scaling 210 basis points versus full year 2019. SG&A, which includes all fulfillment, customer service, credit card processing fees, corporate G&A, corporate payroll and share-based compensation totaled $382.5 million in the fourth quarter or 18.7% of net sales, a 230 basis points year-over-year improvement. SG&A expenses in the quarter include a $15.9 million benefit from the release of a non-income tax reserve and approximately $13 million of COVID related expenses. Excluding these two items, SG&A as a percentage of net sales was 18.9%, a 210 basis point improvement year-over-year.
For the full year, SG&A was $1.40 billion or 19.6% of net sales and scaled 40 basis points year-over-year. Excluding the $15.9 million non-income tax benefit in the fourth quarter and approximately $42 million of COVID related expenses incurred throughout the year, SG&A scaled 80 basis points year-over-year. Fourth quarter advertising and marketing was $150.1 million or 7.3% of net sales, scaling 20 basis points year-over-year.
As we discussed last quarter, the elevated organic acquisition rates we saw in the first half of 2020 began normalizing in the third quarter and that trend carried through to the fourth quarter. As expected, we also saw channel input costs recover from the lower rates we saw in the first half of the year. We adapted to these changes, adjusted our acquisition marketing efforts and drove accelerated customer acquisition in the fourth quarter while still improving our year-over-year efficiency.
On a full year basis advertising and marketing represented 7.2% of net sales, scaling 160 basis points versus 2019. We estimate that roughly half of the marketing efficiency in 2020 was a result of the pandemic-driven boost to traffic and conversion.
In Q4, we delivered our first quarter of positive net income. Net income was $21 million and net margin was 1%, a 550 basis points improvement year-over-year. Excluding share-based compensation expense of $24 million, fourth quarter net income was $45 million with net margin excluding share-based compensation, improving 330 basis points to 2.2%. On a full year basis, our 2020 net loss improved $92.5 million from $252.4 million in the prior year and our net margin improved 390 basis points from negative 1.3%.
Full year net income, excluding share-based compensation was $36.7 million compared to a loss of $116.1 million last year and net margin excluding share-based compensation improved 290 basis points to 0.5%. Fourth quarter adjusted EBITDA was $60.8 million and adjusted EBITDA margin improved 340 basis points to 3%. For the full year, adjusted EBITDA was $85.2 million and adjusted EBITDA margin improved 290 basis points year-over-year to 1.2%.
Turning now to free cash flow. Fourth quarter free cash flow was $47 million, reflecting $77.5 million in positive cash flow from operating activities and $30.5 million of capital expenditures. The positive operating cash in Q4 was primarily a function of Q4 profitability and our favorable working capital strategy. Capital investments continued to be focused on capacity build, including cash outlays for our new automated FCs in Archibald, Pennsylvania and Kansas City and our next limited catalog high velocity fulfillment center.
We finished the year with $563 million of cash and cash equivalents on the balance sheet and free cash flow was essentially breakeven for the year. Let me highlight two points regarding our free cash flow. First, in 2020 we invested in higher inventory levels to protect our supply chain and to ensure that we could meet our customers’ needs, especially during the peak holiday season.
Second, note that we have continued to execute on our strategy to reinvest excess cash flow to grow the business and improve the bottom line. This is evident by the fact that in the last two years we consumed no cash while at the same time we more than doubled our topline, launched four fulfillment centers and improved our adjusted EBITDA margin by 770 basis points. Our strategy remains intact and we remain committed to execution and results in 2021.
That concludes my fourth quarter and 2020 recap. So now let’s discuss our first quarter and full year 2021 outlook. In 2020, we benefited from many tailwinds, some of which we expect to continue into 2021 and some of which may not. On balance, while we believe that consumer behavior post pandemic is still somewhat challenging to predict, we also believe that our strong value proposition, which includes expanding customer choices, provides us real and tangible advantages as we execute on our mission.
To start, the positive demand trends we saw in Q4 have carried over into the new year. Customer spending on our platform remains strong and business vertical mix remains structurally sound. Additionally, the pricing and promotional environment has thus far remained stable and in line with our expectations.
On the other hand, there are certain headwinds that we continue to navigate through the first quarter. We expect some of these to be temporary in nature, while others are likely to remain active hotspots for us to manage throughout the year. For example, we are observing an industry-wide disruption in the availability and supply of vet can food which is driving elevated at our stock levels and sub-optimal inventory positioning across our network. Thus far this has not had a material impact on our business, but it is an area where we intend to remain vigilant.
In advertising and marketing, we intend to remain disciplined in our marketing spend while balancing external variables across advertising platforms and the normalization of market conditions in a post pandemic world. At the same time, we don’t intend to leave any opportunities on the table and reserve the option of making investments that produce long-term customer acquisition benefits even if they affect short-term profitability. We expect to continue scaling SG&A in 2021.
The labor market continues to remain pressured driven by strong e-commerce demand and in certain geographies persistent competition against extended unemployment benefits. We believe that our investments in automation and productivity gains will continue to help us manage these headwinds.
Further, while we will make bold investments like the $60 million of spending on higher wages and benefits that we outlined earlier, we continue to believe that improvements in turnover, productivity and engagement when combined with the efficiencies we expect to realize from the other investments that we’ve made in tech capabilities and machine learning will yield even larger long-term database. With the above perspective in mind, our 2021 guidance balances the opportunities we see with potential headwinds that may arise.
We are establishing guidance as follows. First quarter net sales of between $2.11 billion and $2.13 billion, representing year-over-year growth of 36% to 37% when adjusting for the $70 million of estimated pantry stocking benefit we identified in Q1 2020. Full year 2021 net sales of between $8.85 billion and $8.95 billion, representing year-over-year growth of 25% to 26% when adjusting for the Q1 2020 pantry stocking benefit. And finally, full-year 2021 adjusted EBITDA margin expansion of 50 to 100 basis points.
As you update your models for 2021, here are a few other things to keep in mind. You should expect to see our net active customer adds in 2021 returning to something closer to their pre-COVID levels, reflecting the normal retention patterns we see from any given cohort from the first year into the second year, and this will be especially pronounced this year given the size of the 2020 cohort. At the same time, we expect NSPAC to increase in 2021 versus 2020 as pre 2020 customer cohorts continue to mature and we capture a greater share of wallet from the 2020 cohort. And one final note, with the PetSmart separation complete, we will bring a limited number of administrative functions like tax and insurance in house that were previously run under a shared services agreement with PetSmart. Even with this change, the operational and financial impact of the separation is de minimis.
2020 presented us with many challenges, but it also brought about many beneficial changes in our marketplace. We were well positioned to meet these challenges and we are flexible enough operationally to take advantage of the opportunities. As a result, our 2020 performance was strong across the board. We added a record number of new active customers, produced strong revenue growth and generated four quarters of positive adjusted EBITDA, all of which demonstrates the clear progress we’re making on our path to profitability.
Looking ahead to 2021, we will continue to benefit from the evolving marketplace and our strategic execution should enable us to generate 25% revenue growth or more and further expand our adjusted EBITDA margins.
With that, I will turn the call over to the operator. Operator?
Questions and Answers:
Operator
[Operator Instructions] Our first question today will come from Nat Schindler with Bank of America.
Nat Schindler — BofA Securities — Analyst
Yes. Hi, guys. Thank you for taking my question. Just really want to go a little bit more into the deceleration you’re baking into guidance. I understand it was a pretty radical year this year in how things changed. But obviously all those customers you got cut [Phonetic] and all that new customer growth that occurred all throughout this year is going to be additive to growth for the bulk of next year at least, on average, half of the year. So shouldn’t the deceleration curves barring the 3 percentage point hit roughly that the pantry stocking did in 1Q of last year, barring that shouldn’t be a much smoother slower deceleration in a subscription model like yours?
Sumit Singh — Chief Executive Officer and Director
Hey, Nat. This is Sumit. I’ll take that one. So our guidance has us adding $1.8 billion in topline sales this year on top of a record year in 2020. And I think it’s important to first of all say that we remain confident in our ability to execute to the current environment, which in our opinion remains challenging. So giving guidance to us contains reflecting on all of the headwinds and tailwinds and appropriately balancing the risk and opportunity to be able to provide a point of view this early in the year when we understand consumer behavior and the environment to be evolving and challenging at the same time. So overall we feel good about these numbers and our ability to execute towards them.
And I think another thing needs to be said in the way that we should interpret this. So we believe that with this guidance of $1.8 billion incremental growth, we’re going to capture more than 50% of growth that will happen in the online channels in 2021, which is a powerful statement in itself. So we’ll continue to sort of evaluate this and continue to keep you updated on how we — if we update our models internally at the right time.
Nat Schindler — BofA Securities — Analyst
Just a quick follow-up on that. How much of the incremental growth in the online channel in 2020 do you think you captured?
Sumit Singh — Chief Executive Officer and Director
If you do the math the way — we believe that online grew roughly $6 billion, $6.2 billion year-over-year and this year buy online, pick up in store, which was a popular kind of mechanism is rolled up under online. And if you back that out, pure e-commerce, pure-play e-commerce grew roughly $4 billion and Chewy grew $2.3 billion off that $4 billion. So capturing 57% of pure play e-commerce growth.
Nat Schindler — BofA Securities — Analyst
Great. Thank you very much.
Sumit Singh — Chief Executive Officer and Director
Sure.
Operator
Our next question will come from Brian Fitzgerald with Wells Fargo.
Brian Fitzgerald — Wells Fargo — Analyst
Thanks, guys. Congrats. Great quarter. The average annual increase in year one of the contribution profit at 16% over the past three years, could you tell us what that was in 2020 and in ’19 maybe more specifically? And then, any thoughts on how that might continue to trend over the next three years? And then I have one quick follow-up.
Sumit Singh — Chief Executive Officer and Director
Hey, Brian. It’s Sumit. I’ll take it. So we haven’t broken down numbers. As you know we don’t provide contribution profit level detail. What we are observing and why we wanted to come out and share this is because it was indicative of the results that we are observing as a result of the — direct result of the efforts that we’re putting in to drive consumer LTV and profitability in the portfolio. And so when you sort of roll these back, they answer the second part of your question on a longer-term basis.
These gains across share of wallet and profitability as we evaluate them internally are being realized and reflect the impact of catalog expansion, improve discoverability and the incremental contribution from higher-margin verticals such as healthcare, hardgoods and proprietary brands.
As we mentioned in our remarks, I believe we mentioned this, we’ve nearly doubled our total SKU count in the last three years, including executing a seven-fold increase in higher-margin proprietary branded SKUs. So when you look at sort of margin growth from here on out, we believe we’re still sort of in early innings of what remains really focused roadmap on how we plan to execute our playbook and grow margins from here on out.
Less than a third or approximately a third of our total customer base is today buying a proprietary branded product, which leaves an opportunity for two-thirds of — or roughly 20 million customers to be exposed to higher margin proprietary brands. When you look at healthcare, being a newer vertical that number is far, far lesser than the one-third that I mentioned, providing us even more headroom to grow.
So as we sort of continue to play out our playbook on putting more focus on innovation around products and services and the complementarity between them, you should expect us to drive incremental gradual profit from here on out. That’s how we think about that.
Brian Fitzgerald — Wells Fargo — Analyst
Great. And just kind of a related one for me is just the increase in wallet share you’ve seen during the pandemic, just wondering if you could talk us through maybe how many new pet adoptions and new purchases might be impacting that? For example, if you have a higher mix of new pet parents, how that is influencing the wallet share, the purchases of kennels and beddings?
Maybe said another way, within the life cycle of a pet, right, because maybe not analogy, but the newborn gets no holds barred. They get everything new and fresh and then by the time they get old and you have — newborn two, three or four, you start to recycle cloths. Just wondering if you’re seeing any impact from how you didn’t get [Phonetic] meters through wallet share.
Sumit Singh — Chief Executive Officer and Director
I think that’s a — it’s a great question. So for us, if you recall a data point that we shared this round in the script, we said, we’ve seen a 35% increase in creation of pet profiles for puppies and kittens and a 40% increase in pet profiles for adoptions. Well — I mean, that Chewy puppy, so sure you might not recycle that crate as early as next year. First of all puppies grow out of crates. So you likely have to depending upon the kind of puppy that you brought home. But let’s assume hypothetically that you didn’t, well, even then I think what makes the category attractive to us is the fact that pet sales are mostly recurring in consumables and healthcare and the puppy is going to grow up and eat more food and shred more toys and require greater healthcare needs. And we are here to service all of them. So any kind of impact that we’re seeing right now, we do believe ultimately they’re sustainable momentum behind these kind of profiles or this kind of data that we are capturing. Net-net we have — we kind of looked at our database last week. We have over 170 million data points across these pet profiles that are created that feed in into our recommendation and personalization services and engines and provide us a greater ability to engage customers from here on out. So, the game is very much on and we’re very much focused on continuing to engage customers and gain share of wallet there.
Brian Fitzgerald — Wells Fargo — Analyst
Awesome. Thanks. Appreciate it.
Operator
Our next question will come from Steph Wissink with Jefferies.
Stephanie Wissink — Jefferies — Analyst
Thanks. Good afternoon, everyone. Congrats on a great year. I have a question for you just on the multi-year. If you look back at the IPO model, it looks like you’re running more than two years ahead of your EBITDA target at that time. So I’m curious if you can contextualize for us how much of that is leverage related to the underlying gains of the food and supplies business and how much of that is kind of a pull-forward of some of the strategic initiatives that you listed in your script, like health and compounding and other things? And how should we think about the leverage in the model?
Sumit Singh — Chief Executive Officer and Director
Great question. So I would say that we are — first of all, we’re executing exactly the roadmap we said we would. The scale benefits provide us an ability to drive more fixed cost leverage in our investments and higher variable cost scale in our fulfillment center network given the density of volume that we drive through that network. The shift in gross margins that you observe on top of the SG&A lever is primarily driven as a, I would say — if I were to characterize the impact rate of contribution of net new verticals, I would say 60% is driven by our work towards increasing assortment and choices across proprietary brand, healthcare and hardgoods and roughly 40% just — I’m just doing some of lose math here, is driven by incremental scale across the totality of the business and the Autoship leverage that we get given incremental sales that we push through the Autoship channel.
Mario, anything to add?
Mario Marte — Chief Financial Officer
I mean, I would add to the point on Autoship that if you look at the sales for Autoship in last year alone about $4.9 billion as reported. That’s greater than the entire sales — total net sales in the previous year. So you can see how that portion also is driving leverage. And we said how that impacts not only our ability to better plan inside our four walls of our warehouses but across both our incoming vendors or OEMs and then our logistics partners. So it is a point of leverage in gross margin as well.
Sumit Singh — Chief Executive Officer and Director
The way we think about it, learned what’s important, what’s helpful is food is a staple. So that makes up the necessity of why you would likely visit Chewy. Well, we’re changing that also. But if you just stick with the legacy logic, that’s what attracted you plus the proposition of high touch, high bar customer service. And then our ability to build a basket around that has significantly improved.
Well now, we’ve actually with the choices that we’ve expanded and improved discoverability you’re not only discovering food, you’re actually interacting with us via content channels and figuring out that Connect with a Vet is a service that’s available to you that you might have heard via word of mouth and healthcare is an area that we service you effectively. And we’ve got a Disney collection that is occlusive to us and nobody else has. I think we’re creating these sort of — these differentiations and these advantages that we believe complement each other and ultimately go back and provide benefit to the entire basket and that scale provides leverage to our fixed cost infrastructure.
Stephanie Wissink — Jefferies — Analyst
That’s great. Thank you very much.
Sumit Singh — Chief Executive Officer and Director
Sure.
Operator
Our next question comes from Doug Anmuth with JP Morgan.
Katie — JP Morgan — Analyst
Hey. Thanks. This is Katie [Phonetic] on Doug. So hoping you could provide an update on your Connect with a Vet initiative. What are the early learnings have been thus far and does this shape your expectations around monetization this year? And then on pharmacy, last quarter you laid out a target for $500 million of GMV in fiscal ’20. Curious where you came in relative to your expectation. And then also how you are thinking about the growth potential of pharma this year? Thanks.
Sumit Singh — Chief Executive Officer and Director
Hi, Katie. This is Sumit. So Connect with a Vet is — we’re pleased with the progress of Connect with a Vet. As you — just for the benefit of the audience, it’s a telehealth service, primarily kind of triage that we launched in Q3 that allows us to connect customers with licensed veterinarians to be able to service their needs on most commonly-asked questions or health and wellness related concerns.
We’re pleased with the progress of Connect with a Vet. At this point, we’ve completed — we’re very much in learning mode. We’ve completed over 30,000 sessions with customers and we’re learning a ton. Our net promoter score remains high, about 85. 70% of the customers who have interacted with the service has provided with a 10 on 10 rating, which we’re pleased about. Very recently we’ve expanded Connect with a Vet from purely a chat functionality to video capability, which we are now leaning into progressively. And we’ve also expanded hours of operation — or sorry in about two weeks, we’re going to expand hours of operation from 8:00 PM to 11:00 PM to add greater availability of the service to West Coast customers.
Today the service continues to remain available to Autoship customers for free. We do believe in monetization of the service and availability of it to our entire customer base and I will come and share that with you closer into the time when we’re ready to do that.
And then on healthcare — your second question was about pharmacy. Yes. Overall, we did achieve the numbers that we had shared with you about — the $500 million net sales for pharmacy overall. We did hit that.
And your third question was, our potential or future growth on pharmacy. Yeah, it’s just a vertical that we continue to remain excited in, right. Pharmacy is — when you look at prescription as a vertical, we believe it’s roughly $7 billion to $10 billion in market size growing at 10% CAGAR which would be even in a pandemic year growing at two times the rate that food and supplies is. And we are early stages of — or early innings in that playbook and we remain excited about the upside potential here.
Mario Marte — Chief Financial Officer
Hey, Katie. This is Mario. Just to add one more data point to that. You’re right that we said about $0.5 billion gross revenue, but of course not all that flow through our financials. About $360 million did.
Katie — JP Morgan — Analyst
Great. Thank you.
Operator
Our next question will come from Oliver Wintermantel with Evercore ISI.
Oliver Wintermantel — Evercore — Analyst
Yeah. Thank you, guys. Mario, you just mentioned Autoship and as a percent of sales, it looks like that continue to decline for the third quarter in row. Is that just because people didn’t have yet the chance to sign up for Autoship or is that the expansion of more verticals and more hardgoods? If you could give us a little bit more details on that, please.
Mario Marte — Chief Financial Officer
Yeah. Hey Oli. Yeah. So you’re right, there was a small change, but that’s all within the variance that we would expect any given quarter. If you look at for the full year it was 100 basis point difference between last year and this year, but remember this year we also had a record number of active customers. And as you pointed out that is more about timing and when we expect those customers to sign up to Autoship to discover the benefits there. But that is — it’s certainly within range of what we expect.
Oliver Wintermantel — Evercore — Analyst
Got it. And a quick follow-up just on the gross margin line, you mentioned half of it is structural and sustainable. The rest was less promotions. If I look into 2021, if that structural keeps on playing out and we get back to more promotion should be that easy that we should expect another half of that gross margin expansion expected in 2021 or what are the other moving parts in there?
Mario Marte — Chief Financial Officer
So I’ll start and maybe Sumit wants to add — something to add. But we have said that the improvement that we saw in the fourth quarter, half of it was structural. None of that is any different in 2021. When we think about the vectors that we’re firing against right now, continuing to grow our hardgoods catalog, healthcare proprietary brands, expanding share of wallet and increasing what we sell to our customers, all those things are in place.
What you may find is quarter to quarter there may be some fluctuations in gross margin and that’s simply because we do see some activity in certain times of the year in terms of promotions and maybe some more advertising in the marketplace. But the reality is structurally those things we don’t expect to change.
Sumit Singh — Chief Executive Officer and Director
The only thing I would add is at this time we’re not baking in any topline or bottom line impact related to any material disruptions in supply chain or logistics networks. So far we’re assuming recovery and we’re assuming a quality of recovery that does not impede the momentum of the business. And everything that we’re hearing right now that is an assumption that we’re comfortable with. In some instances, we have the proper amount of inventory and the inventory might be unevenly distributed through our fulfillment network.
And while that does not result in any out-of-stock situation, it does lead to higher levels of cross shipment or split orders that result in sub-optimal shipping costs that rolls up to gross margin. So I think there is some pluses and minuses, but on the balance we do expect customers to continue to engage and discover the higher margin verticals that we continue to focus on and therefore provide gradual structural changes to gross margin.
Oliver Wintermantel — Evercore — Analyst
Got it. Thanks very much and good luck.
Mario Marte — Chief Financial Officer
Thanks, Oli.
Operator
Our next question comes from Seth Basham with Wedbush Securities.
Seth Basham — Wedbush — Analyst
Thanks a lot and good afternoon. My question is around your fulfillment expense outlook. For 2020 with some of the additional costs that you called out, it seems like you did deleverage your fulfillment expenses. Do you think about the outlook for 2021 and the moving pieces with additional investments and rates etc. would you accept you have to leverage with the line expenses or not?
Mario Marte — Chief Financial Officer
Yeah. So, Seth, this is Mario. I’ll answer that. We did in the — on the prepared remarks in the earlier discussion points we said that we would be investing the $60 million in wages and benefits. Most of that is going to be in fulfillment and customer service. We also mentioned that we’re launching two new fulfillment centers this year. And so you would expect there the same type of investments we made in the past, especially last year because one of them is going to be a high velocity limited catalog fulfillment center just like the one we launched in Kansas City last year and the other one is going to be a fully automated or an automated facility, much like the one that we launched in October and in Archibald, Pennsylvania. So, if your question is that we expect those investments to be reflected in our SG&A this year. The answer is — the answer is yes.
Seth Basham — Wedbush — Analyst
Got you. And when we think about the composition on your margin expansion for 2021, are you expecting both gross margin and SG&A leverage?
Sumit Singh — Chief Executive Officer and Director
I think, Seth, we just provided guidance and the checks and balances so far flow through the guidance that we provided for the full year. And as the quarter progresses, I think we’ll keep you updated and share more information on a granular basis.
Seth Basham — Wedbush — Analyst
Fair enough. Thank you very much.
Operator
Our next question comes from Peter Keith with Piper Sandler.
Robert Friedner — Piper Sandler & Co. — Analyst
Hey, good afternoon. It’s Bobby Friedner on for Peter. Thanks for taking my question. I wonder if you could discuss what you’re seeing and how you’re thinking about price inflation in pet food in 2021? And how would Chewy think about retail pricing across the entire portfolio of products in an inflationary environment?
Sumit Singh — Chief Executive Officer and Director
Your question is a little broad, Bobby, so I’ll try to answer this as best as I understand it, and if not, then please clarify. As we have mentioned, pricing environment has remained relatively stable and prices — the discounting levels are relatively muted on a seasonal basis. And that is driving some higher prices and inflation in the marketplace.
But pet is a category that we believe is resilient towards a recession or inflation and in that particular manner we haven’t really seen an impediment to demand or momentum in the business right now. We expect that to continue to be the case. And as supply chain starts recovering and inventory positions become healthier we do believe this to abate and ultimately go back to the pricing environment that we were pre-pandemic.
Robert Friedner — Piper Sandler & Co. — Analyst
Okay. Thank you.
Operator
Our next question comes from Lauren Schenk with Morgan Stanley.
Lauren Schenk — Morgan Stanley — Analyst
Great. Thanks so much. I guess marrying a few of the previous questions, I mean, when we look at your guidance for the 50 to 100 basis points of margin improvement versus the revenue guidance, I think it implies a flow-through rate of around 6%. Understanding there’s $60 million in wages, which brings you closer to 9.5%.
But can you just help us think about if there is any other sort of one-time investment maybe the second automated DC that is holding back flow through or potentially offsetting some of the COVID costs that I would have thought would have sort of benefited flow through this year? And then as a follow-up, maybe this is a piece of it, but we’re hearing from a variety of retailers about shipping delays, freight cost increases. Anything that you’re seeing there on sort of a like-for-like basis heading into 2021? Thanks.
Mario Marte — Chief Financial Officer
Okay. Lauren, this is Mario. I’ll take the first part. So when you think about the guidance we provided, there are several factors that go into it. And obviously we are providing the guidance based on the balance of risks and opportunities we see for the year. So if you think about the revenue we mentioned we have positive demand trends that get into the first quarter, pricing promotions remained stable which are going to be the pluses to the guidance range.
On the other hand, the customer behavior itself is still — post pandemic is still evolving and there are some industry-wide supply chain challenges for certain products. So those I would consider the headwinds. So I’ll give you the plus and minus on that to the revenue guidance range.
And then to the adjusted EBITDA portion of it, we called out a few factors that we know this year or that we expect this year to be a certain way, things like marketing our investments there, the launch of the [Indecipherable] that you mentioned. And then the incremental $16 million or so in wages and benefits for our team members. And it is those factors that depending how they materialize, it’s going to determine exactly where we end up in that guidance range and then what is the actual flow through to EBITDA. Sorry, [Indecipherable]. So as we’ve said before, look we operate the business over the long term. So we, this year may choose to make some short-term investments, including marketing and additional capacity that may impact our profitability in the short term but produce benefits over the long term. So that’s all in the guidance range we provided.
Sumit Singh — Chief Executive Officer and Director
But I think advertising and marketing is an interesting one in 2021 and it’s hard to predict sitting so far up in the year on how this line is actually going to play out. So it’s helpful to sort of extract ourselves from the current and look at it as a 30,000 foot view. We’ve been — first of all, we believe 6% to 7% spend of net sales and advertising and marketing to be the right range for a business like this. And the past couple of years particularly — specifically in the last three years we have scaled marketing expense from 11% of revenue in 2018 to this — past we were 8.8% in 2019 and then 2020 was 7.2%, 7.3%. The 160 basis point improvement, as we mentioned in the script, we believe half of that was driven by organic pandemic driven efficiency. And so that would have put the scaling at right about 8% of marketing.
And so I think starting with kind of current inputs on how we scale marketing, how we understand evolving trends, how do advertising platforms evolve and the ambiguity around that plus any opportunity that we find to be able to invest in marketing and drive scale, it’s a tough area to talk to right now. So I think as we play the quarter out — quarters out, we will likely keep you more updated on our long term — on our early thinking here.
Mario Marte — Chief Financial Officer
And let me just add one more item because I want to make sure that it’s clear how we think about the EBITDA for the year. But the guidance we provided would have us adding over $100 million of EBITDA to the bottom line even while we grow $1.8 billion, both at midpoint of the guidance. So there is a pretty significant increase both topline and bottom line.
Sumit Singh — Chief Executive Officer and Director
And then, your second question was about shipping. The variability and peakiness in demand and forecasting in a business is punitive than planning a supply chain our transportation network. And that is where we believe we’re proud of the team’s for jointly planning our forecasts and coming through with a high degree of forecast accuracy, of course supported by the fact that 70% of our sales — roughly 70% goes to the Autoship model.
So in some way, we provide a predictable and stable base load forecast to our suppliers and transportation carrier partners that then enables them to optimize their micro and macro level asset utilization and that combined with the strategic nature of our partnerships, I mean it’s shielded us from any material changes in rate structure during the holiday season or presently.
Lauren Schenk — Morgan Stanley — Analyst
Very helpful. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Sumit Singh, for any closing remarks.
Sumit Singh — Chief Executive Officer and Director
Thank you very much for the questions. Thank you.
Operator
[Operator Closing Remarks]