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  • Earnings
  • disruptive innovation

Will Chewy’s results live up to expectations?

Investors have developed a taste for Chewy [CHWY] over the last year as more people pamper their pets during the coronavirus pandemic.

Chewy’s share price leapt 143.4% from $48.77 on 8 June 2020 to $118.69 on 12 February as pet owners unable to walk into stores for food, medicine and bedding switched to its ecommerce service.

However, Chewy’s share price dropped to $76.33 on 8 March, when lockdown easings began, as investors fretted that an end to restrictions could lessen the need for online deliveries and cashed in their profits.

Chewy’s share price then bounded back to $87.38 on 13 April off the back of strong fourth-quarter figures showing a 51% rise in net sales to $2.04bn and its first quarter of positive net income, totalling $21m.

 

However, Chewy’s share price slunk back again to $65.68 at close on 13 May as fears over higher interest rates and inflation hit growth stocks.

It stood at $79.47 at close on 8 June.

Will investors’ appetite for Chewy’s share price grow following the company’s first quarter earnings announcement on 10 June?

 

Pet benefits

For the full year 2020, net sales for Chewy climbed 47% to $7.15bn, with its first-ever positive EBITDA of $85.2m, up $166.2m on the previous year.

The company reported that total active customer numbers rose 43% year-over-year to 19.2 million, with its Autoship subscriber base accounting for nearly 70% of sales.

Chewy said more gift card sales, personalised products such as pet portraits and innovations, including its telehealth service, Connect With a Vet, had helped.

Chewy’s first-quarter revenues are expected to climb 31% to $2.12bn, according to a forecast from Zacks Equity Research. It expects a swing from an adjusted loss of $0.12 per share in the same period last year to a positive $0.03 per share this time.

Full-year 2021 sales are projected to soar 25.2% or $1.8bn higher to hit nearly $8.95bn. “Ecommerce was booming long before the pandemic and people utilising automated delivery for essentials like pet food are unlikely to go back even as they return to their normal lives,” wrote Benjamin Rains of Zacks in a Yahoo Finance article.

According to Chewy, the US pet market is expected to rise from $100bn to $120bn by 2024. The company also reported that the number of pet-owning households increased by 5.7% in 2020, a significant acceleration from the pre-pandemic five-year compound annual growth rate (CAGR) of 0.6%.

Many of these were young pets, meaning a lifetime of care ahead. “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,” said Sumit Singh, CEO of Chewy, at the fourth-quarter earnings call.

"In 2020, we observed a 35% year-over-year increase in the creation of pet profiles for puppies and kittens" - Sumit Signh, Chewy CEO

He added that it currently competes for 70% of the $100bn US pet market and therefore has billions of dollars to play for.

 

Leader of the pack

Analysts are also bullish, Market Screener data suggests. They have a consensus outperform rating and an average target of $102 on Chewy’s share price.

“We see Chewy as one of the best-positioned Internet SMID-cap names given its leading online position and expected further brick and mortar share losses, and its ability to reach profitability due to strong marketing efficiency,” Lauren Schenk, equity analyst at Morgan Stanley, said.

However, the re-opening of society brings challenges as pet owners walk back into pet outlets for in-store services such as grooming. In addition, a potential economic downturn could also squeeze disposable income and a reduction in both human and pet treats.

However, Parkev Tatevosian, writing in The Motley Fool, believes the selling of Chewy stock appears to be overdone. “It still has the long-run secular tailwind at its back of sales moving from brick-and-mortar stores to ecommerce,” he said.

More people working from home could also look to pets for company around the house or during long lunchtime strolls.

As of 9 June the company had a 1.94% weighting in the Amplify Online Retail ETF [IBUY], which has climbed 82.4% in the past 12 months (to 8 June). Chewy held a 8.72% weighting in the ProShares Pet Care ETF [PAWZ], which has increased by 57.9% in the same period.

Disclaimer Past performance is not a reliable indicator of future results.

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