Categories Analysis, Retail

Here’s how Chewy (CHWY) held its ground in a COVID-19 world

Chewy said private brands continue to be an important part of its strategy going forward

Shares of Chewy Inc. (NYSE: CHWY) were down 6% in afternoon hours on Friday, a day after the company reported a narrower-than-expected loss and sales that matched estimates for its fourth quarter of 2019. Contrary to other companies, Chewy’s stock has gained 16% since the beginning of this year amid the turmoil caused by the coronavirus pandemic.

Chewy appears to have held its ground in this difficult environment. The company saw sales accelerate in February due to shifts in customer buying behavior, as pet owners stocked pet food and essentials and started shopping more through online channels.

The company stated in its quarterly conference call that the sales acceleration in February was driven by a combination of both existing and new customers. This pickup in sales has continued till now and these trends have been included in the first quarter guidance.

Chewy said it did not experience any significant disruption to its supply chain or the ordering patterns of its customers. The company attributed this to the fact that most of its customers switch to a different pattern, design or brand in the event of low stocks. Chewy also reserves inventories for its Autoship customers. These factors have helped minimize the overall loss.

The company has expanded its network of fulfilment centers and said it has contingency plans ready in case of an outbreak at any of its fulfilment or customer service centers. Chewy stated that it was capable of handling a short period of downtime with minimal disruption to customer service through the diversion of operations to other facilities.

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Chewy said private brands continue to be an important part of its strategy going forward. The company sees private brands grow at the rate of 1.5x and improve their profit margin by around 500 basis points year-over-year. Chewy continues to invest in private brands and Chewy pharmacy.

Chewy cited data from The American Pet Products Association (APPA) that said sales of pet products and services in the US crossed $95 billion in 2019 and are estimated to reach around $100 billion in 2020, indicating an increase in the size of the addressable market and a strong pace of growth.

However, the company warned that demand might moderate once the pandemic subsides as customers draw down their stockpiled supplies. In response to a question about the online/offline mix in the post COVID-19 world, Chewy said it sticks to its earlier estimate that online penetration should reach north of 20-25% in the next couple of years.

The company appears to be bullish on this trend and believes the health crisis will definitely have an impact on customer buying behavior over the long term. Chewy expects net sales to grow 35-37% year-over-year to a range of $1.50 billion to $1.52 billion for the first quarter of 2020.

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