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Chewy Sees Demand Surge in First Quarter From COVID-19

By Evan Niu, CFA – Updated Jun 11, 2020 at 5:07PM

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The online pet product retailer reported better-than-expected results.

The coronavirus pandemic has created a demand surge for a myriad of e-commerce companies as consumers buy stuff online from the safety of their homes. That includes broad platforms like, Shopify, and eBay but also specialty online retailers like Chewy (CHWY 3.46%), which reported first-quarter earnings earlier this week. Pet owners are stocking up due to the pandemic, and management believes the shift in consumer behavior will be permanent.

Here's what investors need to know.

Various types of pet food and treats

Image source: Getty Images.

A record quarter

Revenue in the first quarter jumped 46% to $1.62 billion, topping the consensus estimate of $1.53 billion. That translated into a net loss of $47.9 million, or $0.12 per share. That also beat the $0.17 per share in red ink that analysts were modeling for. Thanks to the better-than-expected results, Chewy posted its first quarter of adjusted EBITDA profits.

Gross margin ticked up by 50 basis points year-over-year, thanks in part to operating leverage and growing sales of Chewy's private label and pharmacy businesses. However, increased freight and logistics costs took a bite out of profitability. As the company scrambled to meet demand and struggled with inventory, it had to fulfill orders in multiple shipments.

Chewy added a record 1.6 million net active customers in the first quarter, bringing total active customers to 15 million. Revenue per customer also increased 7% to $357, which management attributed to consumers stocking up. On the conference call with analysts, CEO Sumit Singh noted: 

After the COVID-19 outbreak, our existing customers started creating bigger baskets. These baskets had a higher mix of consumables in them. We believe these larger baskets with a higher mix of consumables were evidence of pandemic-related pantry stocking, and we estimate this benefited first quarter net sales by approximately $70 million.

The Autoship subscription program, which automatically orders recurring products like pet food or medication, continues to drive the bulk of the business. Autoship revenue was $1.1 billion, or 68% of total sales. This was the first time Autoship revenue topped $1 billion, a momentous milestone. The sign-up and cancellation rates for Autoship among new customers are within historical ranges, but Chewy is optimistic that it can retain these new customers for the long haul.

Looking ahead

In terms of guidance, the pet product retailer expects revenue in the second quarter to be in the range of $1.62 billion to $1.64 billion, which would represent growth of 40% to 42%. Full-year 2020 sales are forecast at $6.55 billion to $6.65 billion, with adjusted EBITDA to be around breakeven for the year. The Street is currently expecting just $6.41 billion in sales for 2020.

In an interview with Bloomberg, Singh said he believes the "increased demand levels that we are experiencing are here to stay."

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Chewy, Inc. Stock Quote
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Shopify Inc.
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