Chewy’s (CHWY) Q2 results might have been disappointing but all hope may not be lost

Shares of Chewy Inc. (NYSE: CHWY) plunged 9% on Thursday after the company delivered disappointing results for the second quarter of 2021 a day ago. While revenue grew on a year-over-year basis, it narrowly missed market expectations. The company reported a net loss that was wider than consensus estimates and the outlook issued for both the third quarter and full year of 2021 was also lower than predicted.

Despite this underwhelming performance, Chewy remains bullish on its growth prospects and its opportunities to gain market share in the near term. Here are a few positives and negatives from the report:

Causes of concern

Although net sales grew 27% year-over-year to $2.16 billion, it narrowly missed estimates of $2.17 billion. Out-of-stock levels remained high in Q2, although slightly better versus Q1, causing a drag on net sales. Its wet dog food business continues to be impacted by production capacity headwinds.

Chewy reported a net loss of $0.04 per share in Q2 compared to a loss of $0.08 per share in the year-ago period. However, this number was wider than the consensus estimate of $0.02 per share.

The company expects net sales to grow 23-25% YoY to $2.20-2.22 billion in Q3 2021 and 25-26% YoY to $8.9-9.0 billion in FY2021. This is lower than analysts’ projections of $2.25 billion and $9.2 billion for Q3 and FY2021 respectively.

Reasons for hope

Not all is grim though. Chewy posted some healthy customer metrics in Q2 and although they are down from the record numbers seen last year, they appear to be pretty stable. Active customers grew 21% YoY to 20.1 million. Gross customer adds were below last year’s levels but above pre-pandemic levels. Chewy acquired approx. 20% more new customers in the first half of 2021 compared to the same period in 2019 and its retention rates are stable.

During the quarter, net sales per active customer increased 13.5% to $404. The company stated on its conference call that it remains optimistic about the trends toward increased pet ownership, higher per pet spending and category shift toward online. Although customers might spend a little less on pet treats in the coming months as they return to their normal routines, Chewy does not believe this will alter the long-term trajectory of the pet category’s shift towards greater online penetration.

Another area of opportunity is Chewy Health. The company has launched a marketplace for veterinarians on its website to help them grow clinic revenues and allow customers to purchase pet medications directly from the veterinarians through the site. The company will open its third Chewy pharmacy later this year.

Chewy is also seeing good growth in its compounding pharmacy service. Compounding net sales rose by almost 50% between the first and second quarters of 2021 helped by higher order volume and larger basket sizes. Through these efforts, the company is positioning itself to take advantage of the rapidly expanding $35 billion total addressable market in pet healthcare.

Despite the short-term headwinds, it appears that Chewy still has room to grow and there is reason to stay optimistic on this stock.

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