Chewy (CHWY) lowers its expectations as pet owners lower their discretionary purchases

Shares of Chewy Inc. (NYSE: CHWY) were down 9% on Wednesday, a day after the company delivered mixed results for the second quarter of 2022. Inflationary pressures have impacted discretionary spend and the company expects this trend to continue in the coming months which led it to lower its top line expectations for the year. The stock has dropped 42% year-to-date and 61% over the past 12 months.

Mixed results

Chewy’s net sales for Q2 2022 increased nearly 13% YoY to $2.43 billion but missed market estimates. The growth in the top line was fueled by increases in both active customers and net sales per active customer (NSPAC). Autoship customer sales increased 17.3% YoY to $1.78 billion.

The company reported a net income of $22.3 million, or $0.05 per share, compared to a loss of $16.7 million, or $0.04 per share, last year, helped by higher sales and gross margins. EPS exceeded analysts’ projections. Gross margins increased 60 basis points YoY to 28.1%, helped by pricing.

Trends

The current inflationary environment has caused pet owners to cut down on their discretionary purchases like hard goods and pet treats. However, demand in non-discretionary, recurring revenue categories like food and healthcare remain strong which benefited Chewy during Q2. Net sales per active customer increased over 14% to $462.

The softness in discretionary categories put pressure on customer acquisition during the quarter. Active customers increased 2.1% to 20.5 million in Q2. Chewy expects customer acquisition headwinds related to discretionary demand to ease as the macro environment recovers and as the company cycles the effects of higher pet adoptions seen during the pandemic.

Chewy has completed the launch of its wellness and insurance program CarePlus, which is now up and running in 31 states. The company expects to roll out this program across the nation by year-end. Over the long term, Chewy expects CarePlus to provide it with the opportunity to grow the pet insurance total addressable market and gain market share in a high-margin business.

Outlook

Chewy anticipates demand for essential goods to remain high and inflation to continue to weigh on discretionary purchases through the remainder of the year. Therefore it has reduced its sales guidance for the full year of 2022. Net sales for FY2022 are now expected to grow 11-12% YoY to a range of $9.9-10 billion. This compares to the previous expectation of 15-17% growth to $10.2-10.4 billion.

For the third quarter of 2022, the company expects sales to grow 10-11% YoY to $2.44-2.46 billion. Chewy, however, increased its profitability outlook for the full year and now expects adjusted EBITDA margin to range between 1.75-2% versus the prior outlook of breakeven to 1%.

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