Chewy (CHWY 4.65%) is turning out to be one of the unintended beneficiaries of the social-distancing measures deployed in the U.S. to counter the COVID-19 outbreak. The online pet store's latest quarterly report turned out to be a solid one as more people ordered pet supplies from home.
The company reported a 40% jump in revenue for fiscal 2019 to $4.85 billion, and Chewy is confident it can sustain its impressive growth in the ongoing quarter as well. It's not hard to see why.
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What's working for Chewy?
Chewy is guiding for $1.50 billion to $1.52 billion in revenue in its fiscal first quarter, a jump of 35% to 37% over the prior-year period. The company didn't issue full-year guidance as it gauges the impact of the novel coronavirus outbreak on consumer shopping behavior, but the near-term outlook provides a strong signal that the company can emerge stronger from the pandemic.
Management pointed out on the latest earnings conference call that Chewy's sales growth kicked into a higher gear beginning late February as pet owners started stocking up on essentials. The company was already witnessing a nice bump in spending by customers before the pandemic took hold -- a trend that's likely to continue under the current circumstances.
Chewy added 2.9 million new customers in fiscal 2019 and ended the year with 13.5 million active customers. Its net sales per active customer also went up 10% during the year to $360. What's more, 70% of the company's total fourth-quarter revenue came from its Autoship subscription business.
Sales from the Autoship segment jumped nearly 41% year-over-year after excluding the impact of the extra week in the prior-year period. That was better than the 35% jump in the company's overall revenue for the fiscal fourth quarter. As more pet owners order pet food and other supplies online to preserve social distancing, Chewy has greater access to a new pool of Autoship customers who may stay loyal to the company even after the outbreak is contained.
A few concerns, but investors should look at the bigger picture
Wall Street seems concerned that a near-term surge in orders could weigh on Chewy's margins. Wedbush Securities analyst Seth Basham cited that the lack of earnings guidance or full-year guidance should make investors uneasy.
Management didn't do much to allay those fears as CFO Mario Marte warned earlier this month that the "high operational tempo required to meet peak demand periods like we are experiencing now can impact efficiency on the fulfillment side." He also added that the company might see a moderation in demand after the crisis subsides as customers work through their existing stockpile of pet supplies before placing new orders.
But the good part is that Chewy is taking steps to mitigate these potential headwinds. The company is on track to open a new fulfillment center in North Carolina by the end of April for faster service to customers in the Mid-Atlantic and Southeast regions. The company also plans to launch an automated fulfillment center in Pennsylvania later this year, which management believes can reduce "variable fulfillment cost per unit" by at least 30% thanks to greater throughput capacity and labor productivity.
The gains delivered by an automated fulfillment center will be complemented by the growth in Chewy's private-label offerings. The latter is already driving impressive margin growth for the company. Chewy ended fiscal 2019 with a 23.6% gross margin, a nice jump from fiscal 2018's 20.2% figure. The company's adjusted EBITDA loss also shrank year over year from $55 million to just $6 million in the fourth quarter.
More importantly, Chewy isn't just a safe-haven play amid the novel coronavirus pandemic. The company operates in a huge market that's expected to grow at a nice pace in the long run. The American Pet Products Association (APPA) projects that sales of pet products and other services could touch $100 billion this year.
The organization also predicts that more people could start procuring pet supplies online. APPA's research found that 72% of pet owners made an online purchase in the past year. Additionally, 94% of consumers on subscription plans report that their buying frequency has either increased or stayed consistent over the past year too.
So don't be surprised if Chewy continues to beat the market in the coming months and turns out to be a growth stock that delivers long-term gains for investors.
