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Should You Buy Chewy Stock Ahead of Q2 Earnings?

By Parkev Tatevosian, CFA – Aug 23, 2021 at 8:30AM

Key Points

  • Chewy last reported having 19.8 million active customers.
  • Analysts on Wall Street expect the company to report slightly higher growth than management has guided for in the fiscal second quarter.
  • Chewy stock is up 28% in the last three months.

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Expectations are high for the online pet retailer heading into its next quarterly report.

Online pet retailer Chewy (CHWY -3.67%) is set to report its fiscal 2021 second-quarter earnings on Sept. 1. Since the pandemic's onset, the company has attracted millions of new customers as people stocked up on supplies for their pets without leaving the comfort of their homes.

But that tailwind is fading as economies reopen and people feel more comfortable visiting their local stores again. Still, many of the customers who made purchases from Chewy during the pandemic are likely to stick around. Plus, in the long run, more shopping will inevitably transition online. Let's take a closer look at Chewy's business and what to expect in the next round of earnings.

A woman and her dog outside.

Image source: Getty Images.

Growing efficiently 

Chewy boasted having 19.8 million active customers at the end of its fiscal first quarter, an increase of 31.6% from the same time last year. These customers spent an average of $388 annually. Interestingly, customers increase their spending with Chewy over time. Their annual spending averages about $400 in their second year, $700 in their fifth, and $900 in their ninth. If those patterns persist, that's a good sign for future revenue as shoppers gained during the pandemic mature into more valuable customers.

Chewy sells third-party and private-label pet food, pet products, pet medications, and other pet health products. Profit margins are higher for its private-label brands versus third-party, and they're also higher for hardgoods versus consumables. In the fiscal first quarter, gross profit margin expanded 420 basis points year over year due to the increased penetration of hardgoods and private-label offerings. As Chewy serves customers and builds relationships over time, its ability to sell its own branded products will increase, along with profitability.

Boosted by the pandemic, annual revenue reached $7.15 billion in fiscal 2020, 47% higher than the prior year. Growth is expected to slow in fiscal 2021, and management is guiding for full-year top-line growth of 25% to 26%. However, over the next several years, Chewy should reap the benefits of the new customers it gained during the pandemic as they increase their annual spending. 

Challenges remain in the near team

Chewy has good long-term prospects, but challenges remain in the near term. The economic reopening is presenting more challenges than just a decline in sales growth. Businesses are calling back workers, and that's creating a crunch in the labor market. Chewy reported having difficulty staffing fulfillment centers, and it had to increase wages to attract employees.

Moreover, the delta variant is causing an increase in COVID-19 outbreaks in manufacturing facilities, shipping ports, and other important logistical centers. The effect on Chewy's business is a shortage of some products, resulting in higher out-of-stock levels than usual. That's costing Chewy sales, and if a customer has to go to a competitor instead, the company could potentially lose that customer. 

What this means for investors

Wall Street analysts expect Chewy to report revenue of $2.2 billion and a loss per share of $0.02 for its fiscal second quarter. That consensus estimate for revenue is in line with management's guidance of $2.15 billion to $2.17 billion, and it would represent growth of approximately 30% year over year.  

The stock is already up nearly 30% in the last three months, and expectations are high going into the earnings report. Investors interested in buying shares of this online pet retailer will want to closely watch the next earnings report as the company sheds light on how it will navigate a future without the boost from a global pandemic.

Parkev Tatevosian owns shares of Chewy, Inc. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

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