Chewy (NYSE:CHWY) has turned out to be a hot growth stock in 2020 thanks to the coronavirus pandemic that accelerated the shift toward online shopping for pet products. The online pet retailer's top-line growth took off nicely as people stayed at home on account of lockdowns and shelter-in-place orders.
But those who have missed the Chewy gravy train so far shouldn't feel disappointed, as the company looks primed for more upside in 2021. Let's see why.
Chewy looks capable of sustaining its growth in a post-pandemic world
Chewy's latest earnings report for the third quarter of fiscal 2020 that ended on Nov. 1 turned out to be better than what investors were expecting. The company's revenue jumped 45% over the prior-year period to $1.78 billion, comfortably ahead of the $1.72 billion Wall Street estimate. Its gross margin increased 180 basis points year over year to 25.5%, helping the company reduce its adjusted net loss to $7.7 million during the quarter from $39.6 million a year ago.
Chewy managed to post such impressive numbers thanks to a sharp spike in the number of active customers, as well as an increase in spending by pet owners. The company exited the quarter with 17.8 million active customers, a jump of nearly 40% over the prior-year period. Additionally, net sales per active customer increased by 2.8% over the year-ago quarter to $363.
The important thing to note here is that Chewy clocked these numbers during the three-month period spanning August to October, well after states in the U.S. started reopening. This clearly shows that people are continuing to buy pet food and other products from Chewy even though physical retail locations have reopened.
More importantly, the company's Autoship subscription business turned in yet another solid quarter of growth. Chewy's autoship sales were up 42.5% over the prior-year period to $1.23 billion, accounting for almost 70% of revenue.
The Autoship program allows Chewy customers to reorder regularly required pet items automatically and enjoy additional perks such as discounts and free shipping over a minimum order value. The segment's growth indicates that Chewy is building up a sticky customer base that is likely to stay with the company even after the coronavirus pandemic fades.
Not surprisingly, Chewy issued a solid forecast for the current quarter. It anticipates revenue growth between 43% and 45% this quarter as compared to the prior-year period. For the full year, Chewy anticipates 45% to 46% revenue growth to a range of $7.04 billion to $7.06 billion, improving over fiscal 2019's revenue growth of 40%.
All of this makes it clear that Chewy has stepped on the gas in 2020, aided to some extent by the tailwinds that the COVID-19 crisis created for its business. But don't be surprised to see the company switch up a gear in 2021 thanks to its moves into a couple of important markets.
New catalysts that could help boost growth
The online pet retail space is a big hunting ground for Chewy and it will continue to remain so as more customers are moving to the online channel at an impressive pace. But the company has made a couple of nice moves to diversify its business of late by introducing a telehealth service for pets and expanding its pharmacy business that allows owners to order customized compounded pet medications.
Chewy's management pointed out on the latest earnings conference call that it is on track to generate more than $500 million in revenue from the overall pharmacy business this year. The company claims that this scale of revenue makes it the "largest e-commerce pet pharmacy in the U.S." That would put Chewy in a great position to tap into a booming market as pet medication sales in the U.S. are expected to hit $12 billion in the next couple of years, according to third-party estimates.
What's more, online pet medication sales account for a small portion of the overall market. Packaged Facts reported in 2018 that only 12% of pet medication was sold online. As Chewy is offering pet parents a combination of telehealth and an online pharmacy, it now seems to have a better chance of tapping into this multi-billion-dollar market.
So, Chewy can count on an additional engine to power its sales in 2021. This could help it sustain the high growth rates it has clocked this year and deliver more upside to investors, who have laughed all the way to the bank in 2020 thanks to its terrific run on the stock market.