Take A Bite Out Of Chewy Ahead Of Earnings

For some companies, just about everything has broken right since the onset of the pandemic. Chewy (NYSE:CHWY), an online retailer of pet food and other pet-related products, is one of those companies:

  • E-commerce has boomed this year.
  • The remote work boom has resulted in people moving from city apartments to suburban houses, giving them the space for a pet.
  • People have increasingly added pets to their households because they are stuck at home and lonely.

Those tailwinds boosted an industry that was already thriving pre-pandemic. US pet expenditures were $95.7 billion in 2019, up roughly five-fold over 1994 levels. According to the American Pet Products Association, US pet expenditures have not seen a single year-over-year decline in at least the past 25 years. Pet-care spending isn’t just recession-proof when the recession forces people to stay at home—it grew 29% during the 2001 recession and 17% during the 2008-09 recession.

Chewy is Industry Leader

In Q2, Chewy’s revenue increased 47% yoy to $1.7 billion. Chewy is scheduled to release its Q3 numbers tomorrow after the bell; quarterly revenue is expected to be $1.71 billion, up 39% yoy.

Earnings aren’t expected to really materialize for a while—Chewy reported a net loss of $32.8 million in Q2, for example—but that’s okay for a company growing at such an explosive rate. Earnings will become important when revenue growth slows down a lot—perhaps several years from now.

What is important right now is market share. On the Q2 earnings call, management provided data that showed Chewy is doing very well on this front:

“Industry data provider Packaged Facts predicts that online pet product sales in the US will increase by $3.9 billion this year, with online sales gaining five points of market share year over year to reach 27% of all pet product sales. Against that backdrop, the midpoint of our 2020 guidance has us growing our revenue by approximately $2 billion year over year.”

Chewy is projected to acquire half of the new sales in its industry. That’s leadership.

Net Sales Per Active Customer (NSPAC) is Growing

In Q2, Chewy’s net sales per active customer was $356, up 3.2% yoy. Nice to see, but the projected growth rates for this metric are what have me realty excited:

Chewy expects the NSPAC of its new customers to reach “approximately $500 by year 2 and over $700 by year 5.”

So why is Chewy projecting such high growth?

Chewy is optimistic because its new customers’ initial engagement levels have been encouraging. Furthermore, Chewy has expanded its offerings to include Rx prescriptions, private label products, and gift cards. The company believes that early exposure to its new offerings will result in higher customer lifetime values.

I believe in Chewy’s ability to dramatically increase its NSPAC. The logic is sound and this is a company that has a demonstrated history of innovation and leadership.

Telehealth Services… For Pets?

Humans have used telehealth services to stay on top of their health in 2020. Well, Chewy took notice and figured that people may want the same service for their pets. Chewy launched “Connect With a Vet” earlier this year, which allows customers to connect with a licensed veterinarian to get answers to pet health questions.

The service is free for customers that are enrolled in Chewy’s Autoship program. That program accounted for 68% of sales in Q2, so it’s already massively successful, but Chewy is clearly hungry for more.

By throwing in this very valuable freebie, Chewy should be able to attract a lot of new members. Obviously, it will cut into margins a bit (the vets aren’t free for Chewy), but I like this move because sacrificing short-term profits for long-term market share is smart for Chewy at this stage of the game.

A Lofty Valuation, But Chewy is Worth It

Chewy is trading at 4.5x forward sales and its earnings are nonexistent.

But this is an excellent company in a growing industry. Shares could seem downright cheap in a few years if Chewy continues its rapid ascent.

CHWY set all-time highs early last week, before a slight pullback.

I like the chances of a strong report tomorrow afternoon. I’d look to get in ahead of the release—if Chewy beats, it could easily surge to fresh all-time highs.

CHWY Daily ChartCHWY Daily Chart

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