Insights

Will Chewy Disappoint Investors on Wednesday?

Chewy (NYSE: CHWY) has some big questions to answer for investors on June 1. Shares of the online pet supplies company have underperformed the market by a wide margin in recent months, mainly due to worries about a slowdown in the e-commerce industry.
Chewy also gave investors reasons to worry in its last earnings report, which showed falling customer retention that might portend weaker growth ahead. CEO Sumit Singh and his team will likely discuss that issue, plus rising costs, in the upcoming report.
Let’s take a closer look.
Image source: Getty Images.

About customer retention …
In March, Chewy announced solid sales growth with revenue rising 24% in the fiscal year ended Jan. 30. But growth slowed throughout the year, and that deceleration remains a big concern. The even bigger worry was Chewy’s reduced retention rate. Retention among new customers from the fiscal 2020 fourth quarter was “below what we typically observe,” Singh said at the time, and that churn was the main factor behind its weaker sales results.
Management said the weak retention mainly had to do with unusual shopping behavior tied to the earlier phases of the pandemic. That explanation implies a steady return to more normal churn rates over the next few quarters, and investors will want to see evidence of that on Wednesday.
Net losses
Chewy’s slowing growth wasn’t the only factor pushing investor confidence down in early 2022. The company also swung to a net loss in its last quarterly report, even by management’s preferred adjusted EBITDA metric.
Chewy has been busy raising prices and cutting costs since that time, though, and those initiatives had executives feeling confident that the business can set new profitability records. Follow gross profit margin for signs of that rebound. Chewy wants that figure to move toward 28% of sales over time, but it took a step away from that target in late 2021.

Data by YCharts.
The bright side
The long-term outlook for Chewy’s business is bright. Pet adoption rates might be coming down compared to earlier phases of the pandemic. However, spending on pet supplies is still soaring in key markets like the U.S. and Canada. Chewy’s high proportion of subscription-based shoppers — Autoship sales made up nearly 71% of total sales in the most recent quarter — implies solid engagement and a good shot at increased market share over time.
As long as those subscription metrics remain strong, the business is likely to outperform the wider pet supply market. Sure, the next few quarters will involve more volatility than investors have seen in a while due to the aftermath of pandemic-related swings in e-commerce trends. But once the dust settles, Chewy’s push to improve margins and gain market share should support solid investor returns.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, Inc. The Motley Fool has a disclosure policy. –

Chewy (NYSE: CHWY) has some big questions to answer for investors on June 1. Shares of the online pet supplies company have underperformed the market by a wide margin in recent months, mainly due to worries about a slowdown in the e-commerce industry.

Chewy also gave investors reasons to worry in its last earnings report, which showed falling customer retention that might portend weaker growth ahead. CEO Sumit Singh and his team will likely discuss that issue, plus rising costs, in the upcoming report.

Let’s take a closer look.

Image source: Getty Images.

About customer retention …

In March, Chewy announced solid sales growth with revenue rising 24% in the fiscal year ended Jan. 30. But growth slowed throughout the year, and that deceleration remains a big concern. The even bigger worry was Chewy’s reduced retention rate. Retention among new customers from the fiscal 2020 fourth quarter was “below what we typically observe,” Singh said at the time, and that churn was the main factor behind its weaker sales results.

Management said the weak retention mainly had to do with unusual shopping behavior tied to the earlier phases of the pandemic. That explanation implies a steady return to more normal churn rates over the next few quarters, and investors will want to see evidence of that on Wednesday.

Net losses

Chewy’s slowing growth wasn’t the only factor pushing investor confidence down in early 2022. The company also swung to a net loss in its last quarterly report, even by management’s preferred adjusted EBITDA metric.

Chewy has been busy raising prices and cutting costs since that time, though, and those initiatives had executives feeling confident that the business can set new profitability records. Follow gross profit margin for signs of that rebound. Chewy wants that figure to move toward 28% of sales over time, but it took a step away from that target in late 2021.

Data by YCharts.

The bright side

The long-term outlook for Chewy’s business is bright. Pet adoption rates might be coming down compared to earlier phases of the pandemic. However, spending on pet supplies is still soaring in key markets like the U.S. and Canada. Chewy’s high proportion of subscription-based shoppers — Autoship sales made up nearly 71% of total sales in the most recent quarter — implies solid engagement and a good shot at increased market share over time.

As long as those subscription metrics remain strong, the business is likely to outperform the wider pet supply market. Sure, the next few quarters will involve more volatility than investors have seen in a while due to the aftermath of pandemic-related swings in e-commerce trends. But once the dust settles, Chewy’s push to improve margins and gain market share should support solid investor returns.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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