Chewy (CHWY): A look at the good and the bad from the Q1 earnings report

Shares of Chewy Inc. (NYSE: CHWY) were up 24% on Thursday after the company delivered better-than-expected results for its first quarter of 2022 a day ago. Sales surpassed expectations and the pet retailer posted a surprise profit for the quarter but margins declined from the prior-year period. The stock has dropped 50% year-to-date. Here’s a look at the good and the bad from the quarterly report:

Sales growth and surprise profits

Chewy’s net sales in Q1 increased 13.7% year-over-year to $2.43 billion. Sales were also up 4% sequentially. The top line performance was driven mainly by increases in active customers and net sales per active customer. Active customers increased 4.2% YoY to 20.6 million while net sales per active customer grew nearly 15% to $446. Since the start of the pandemic, Chewy’s NSPAC has grown 24%.

Chewy saw strong demand within consumables and healthcare but demand for hardgoods softened due to the impact of inflation on discretionary purchases. Autoship customer sales increased 18.5% YoY to $1.75 billion in Q1. Autoship sales made up 72.2% of total sales in the quarter.

Chewy delivered a profit of $0.04 per share in Q1 compared to analysts’ projections for a loss of $0.14 per share.

Decline in margins and profitability

Although it delivered a surprise profit in Q1, Chewy’s net income fell 52% YoY to $18.5 million, driven by a drop in gross margins and higher expenses. EPS of $0.04 was down 55% YoY. Gross margin declined 10 basis points YoY to 27.5% but was up 210 basis points sequentially.

The sequential improvement in gross margins reflected improved product margins driven by pricing strength. It also reflects the supply chain and logistics initiatives the company undertook to mitigate higher freight costs. Despite this improvement, Chewy expects to see volatility in the macro and supply chain environment and inflationary pressures to persist through the remainder of the year.  

In Q1, Chewy’s net margin was down 100 basis points to 0.8%. Total operating expenses rose 18% to $649 million from the year-ago quarter. SG&A expenses were up 24% YoY. Adjusted EBITDA dropped nearly 22% to $60.5 million while adjusted EBITDA margin fell 110 basis points YoY to 2.5%.

Guidance

For the second quarter of 2022, Chewy expects net sales to grow 13-14% YoY to $2.43-2.46 billion. For fiscal year 2022, net sales are estimated to grow 15-17% YoY to a range of $10.2-10.4 billion while adjusted EBITDA margin is expected to range between breakeven to 1%.

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