Chewy (CHWY) stock shows signs of recovery amid cost concerns

Chewy Inc. (NYSE: CHWY) stock rebounded over 17% in the past month and over 25% in the past three months as the pet food industry is expected to rise due to higher demand for organic pet food. The shares remained under tremendous pressure after falling over 17% since its initial public offering on June 14, 2019.

The company continues to make more profit from existing customers backed by an aggressive increase in product assortment and the rapid growth in its number of active customers. This is likely to drive Chewy’s gross margin higher but an increase in the costs and expenses could be impacting the bottom-line performance.

Chewy is expected to increase its investments in order to support the overall growth of its business, including the opening of a new fulfillment center and growth of fulfillment and customer service headcount. It also includes investments in security and data protection software. This could result in a rise in selling, general and administrative expenses.

The company is expected to experience higher sales from several growing subcategories of private brands including Frozen Foods, jerky treats, and natural bones and chews. Also, in the hardgoods, sales are likely to continue showing growth in specific subcategories such as Frisco potty pads, poop bags, apparel, and leashes.

Chewy relied upon customer retention rates that will be stable backed by its initiatives such as increased assortment, improvements in site merchandising, and maturation in both pharmacy and private brands. The holiday season drove an opportunity to expand its assortment and category depth in most popular seasonal categories.

The US pet food market is predicted to be worth more than $29 billion by 2025, according to a report from the Research and Markets. The report stated that the demand for pet food could rise backed by the shift in the consumer conscious to organic ingredients and those free from pesticides and artificial flavors.

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For the third quarter, Chewy posted a wider loss due to higher costs and expenses. The bottom line was wider than the analysts’ expectations while the top line exceeded consensus estimates. The company continued to see growth in the customer base as well as increased spending among its customers.

As of November 3, 2019, cash and cash equivalents totaled $135.9 million, an increase of $47.5 million from February 3, 2019. The company has financed its operations and capital expenditures primarily through sales of convertible redeemable preferred stock and cash flows generated by operations. For the next 12 months, the cash and availability under its new revolving credit facility will be sufficient to fund its working capital and capital expenditure requirements.

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