Categories Analysis, Retail

Chewy (CHWY) continues to get chewed out after delivering disappointing results for Q4

For full-year 2022, net sales are estimated to range between $10.2-10.4 billion

Shares of Chewy Inc. (NYSE: CHWY) were down 16% on Wednesday, a day after the company delivered disappointing results for the fourth quarter of 2021, with both the top and bottom lines missing estimates. The stock has dropped 27% year-to-date and 49% over the past 12 months. Like most retailers, Chewy saw inflation bite into its profits during the quarter but the company expects to gain some relief from these pressures as it moves through the year.

Positives

For the fourth quarter of 2021, net sales grew 17% year-over-year to $2.39 billion, driven by growth in active customers and net sales per active customer. Active customers increased 7.6% to 20.6 million while net sales per active customer rose more than 15% to $430.

Chewy continued to benefit from increased pet ownership and higher average spending per pet household which drove demand for its products and services. The company witnessed positive trends in site traffic, conversion, order volumes, and basket size which indicate healthy levels of customer engagement. Another indicator of engagement is the momentum seen in the Autoship program. Autoship customer sales increased 21.2% year-over-year to $1.69 billion.

Chewy competes in a $120 billion total addressable market (TAM) today that is expected to grow rapidly over the next five years. Within this broader pet TAM, ecommerce sales are expected to grow even faster.

Another area where the company is looking to establish itself is the Fresh and Prepared Meals category as more and more pet owners look for fresh food options for their pets. Fresh and Prepared Meals is a total addressable market that is estimated to grow from approx. $1 billion today to north of $3 billion by 2025.

Chewy Health continues to gain market share with sales at Chewy Pharmaceuticals rising 75% during the fourth quarter. Chewy Health is working on expanding its footprint in the $35 billion pet healthcare market by rolling out new products and services for pet health and wellness.

Negatives

Despite recording a double-digit growth year-over-year, Chewy’s Q4 net sales fell short of market estimates. The company also delivered a net loss of $0.15 per share which was wider than expected. Gross margin during the quarter declined 170 basis points to 25.4% mainly due to higher inbound freight costs and pricing lagging cost inflation.

Net cash used in operating activities was $66 million compared to net cash provided by operating activities of $77.5 million in the year-ago period. Free cash flow was also negative at $113.4 million compared to a positive $47 million last year.

Outlook

Chewy anticipates positive demand trends to continue through 2022. It is also seeing pricing catch up with inflation and a reduction in inbound freight costs. However, it continues to see supply chain disruptions and high out-of-stock levels. The company’s outbound shipping contract with FedEx (NYSE: FDX) is now in effect and for the full year, the outbound freight impact on gross margins is estimated to be between 100-150 basis points, inclusive of higher fuel prices.

For full-year 2022, net sales are estimated to range between $10.2-10.4 billion, representing a 15-17% growth YoY. Gross margin is expected to be broadly in line with 2021. For the first quarter of 2022, net sales are projected to grow 12-14% YoY to $2.40-2.43 billion.

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