Chewy (NYSE:CHWY), the fast-growing online pet supplies retailer acquired by PetSmart in 2017, is set to go public soon. The company is expected to price its shares between $17 and $19, putting its valuation at roughly $7 billion. Chewy produced revenue of $3.5 billion in 2018, up 68% from 2017, and posted a net loss of $268 million.

The big selling point for Chewy, other than its rapid growth, is its subscription revenue. In its S-1 filing, Chewy reports a metric called "Autoship customer sales." Autoship is Chewy's subscription program, which gives customers a small discount by having a particular product delivered at specific intervals. It's similar to subscription programs from other online retailers like Amazon.com and Target.

Chewy reported Autoship customer sales of $2.32 billion in 2018, accounting for nearly two-thirds of total revenue. Autoship customer sales have exploded in recent years, growing from just $115 million in 2014. It would seem that subscription revenue has been the overwhelming driver of the company's growth, at least at first glance.

A tan dog.

Image source: Chewy.

Not what it seems

But that may not actually be the case. If you didn't read Chewy's explanation of this "Autoship customer sales" metric, you would probably assume that the Autoship subscription program is directly responsible for all that revenue. It's not.

Here's the definition of this metric, straight from Chewy's S-1 filing (emphasis is mine):

For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers), for that quarter.

Anyone who has had an Autoship order shipped in the preceding 364-day period is considered an Autoship customer. And any revenue generated from those Autoship customers, no matter if it's through the Autoship program or not, is counted as Autoship customer sales.

A customer could place an Autoship order to get the discount and cancel the subscription after one delivery, and everything they buy from Chewy over the next year will be counted as Autoship customer sales.

Chewy estimates that sales outside of the Autoship program account for around 15% of Autoship customer sales, which suggests that most of this revenue is still coming subscriptions. But there's another problem with this metric.

Since Autoship subscriptions can be cancelled at any time with no downside for the customer, some portion of Autoship customer sales is comprised of customers using the Autoship program to get discounts on one-off orders. Chewy doesn't appear to report churn rates or any similar metric, so we don't know how much of this revenue is genuinely recurring and how much is just one-off sales in disguise.

A more useful metric would be sales generated only from Autoship subscriptions that have been delivered at least twice. That would eliminate both problems with the Autoship customer sales metric. Unfortunately, that's not what the company reports.

Chewy's genuine subscription revenue is probably quite a bit lower than its Autoship customer sales metric suggests. And since the Autoship program is basically the same as programs offered by other online retailers, there's not much reason to believe that Autoship gives Chewy any kind of competitive advantage.

On the surface, Chewy looks like a subscription revenue powerhouse. In reality, it's just another money-losing online retailer.