Chewy's (CHWY +4.29%) management team just gave shareholders lots of new information about its latest operating results.
In this video, from "Beat & Raise," recorded on Dec. 10, Fool contributors Rachel Warren and Demitri Kalogeropoulos discuss a few of the highlights from the pet supply giant's shareholder letter.
Rachel Warren: They have a really nice colorful shareholder letter, which just is a nice way to look at some of these numbers and help it hit home a little bit more. Some of this will be a repeat, but worth delving into. As you mentioned, net sales up 24% year over year. This was interesting. Active customers were up a little bit less than 15% year over year. If you see, there, compared to the same quarter of 2020, so like what you were talking about, Demitri, with that impressive customer growth and net sales per active customer was up 15% year over year as well. It's like really nice double-digit growth.
Demitri Kalogeropoulos: Yeah, obviously perfect balance there, 15% in both. You'd love to see that. You're growing customers and at the same time, your average customer is spending a lot more.
Warren: Absolutely. Then that gross margin up a solid 90 basis points year over year. Net margin still in negative territory there. Of course, it's net loss as well. This was interesting, though, going to the bottom. Can you see that OK or is that too small? I think it's as big as I can make it. [laughs] It can make it bigger. There we go. [laughs] So one of the things I like about this is that you can look at its performance, not just during the quarter, but also for the first 10 months of the year. So you see here how during the first 39 weeks of the year, its net sales rose 27% compared to the same period in 2020. That captures a huge part of that timeline where people were stuck at home ordering an above-average amount of things for their pets. It is worth noting. The company, obviously its bottom line is still in negative territory. It is narrowing. It was down a little bit year over year, but if you look at this amount, in the 39 weeks ended Oct. 31 of this year, the company reported a net loss of about $10.2 million. But that was about a $114 million in the same period last year. So it is narrowing and I think getting ever closer to profitability, which I think is very encouraging as well. Free cash flow was down 93%. That was one number that caught my eye. I don't know if you have any thoughts on that. We know they're investing a lot, again, in building the business.
Kalogeropoulos: It's encouraging to see that year to date, that number is rising so much. They could have something to do with the timing of certain big purchases they made this quarter. But it's good to see that positive territory.
Warren: Absolutely. That was a very encouraging number, I thought as well, because you're seeing how here it's down 93% year over year, but it's positive in that first 10 months of the year. I think that's really good. As well, that first 39-week period of the year, active customers is up 14%. So I think that's clear evidence that it's not just a pandemic play and maybe some of the deflation in shares is some remaining uncertainty about that. But I think these numbers are very encouraging as well. Again, that same period, the first 39 weeks of the year, 15% increase in net sales per active customer. Demitri, he was talking about auto-ship customer sales. Those were up 30% from the same period in 2020. So I think those are all really meaningful gross numbers that should be very encouraging as to the company's ability to keep growing. I'm going to just go ahead and keep scrolling because there was a few things I wanted to also touch upon.
Kalogeropoulos: They talk in their annual report a bit about how the way the pet market is changing particularly in the U.S. People are increasingly viewing pets as members of the family. Should not then surprise you, which obviously has a whole lot of implications business-wise. If you can be a trusted provider like this, we're seeing people trend toward more premium purchases all up and down. I know you cover a lot of retail stocks like I do. Things like Apple and people are buying the more premium products, up and down the consumer, discretionary, and staples. But in this case, it could be helpful in terms of you can see how they would raise their margins over time in terms of offering premium products. Then also there's the bonus of in a recession, you don't really stop feeding your family members. For example, it's this is [laughs] probably a pretty recession-proof business they are setting up in that way. I know there's some history of that. There's a steady growth in spending on pets no matter what happens in the wider economy.
Warren: Well, I think that's a really good point and I like to look for stocks that have that kind of market power in the sense that, OK, even in the short term, if the stock price isn't where investors might hope it would be, you look at the business and the products that it sells and the types of services it offers, whether that be upcoming, the pet insurance we'll be able to purchase on the platform or connecting with a vet or getting compounded medications for your pets. Those are things that pet owners are going to need no matter what's happening out in the market or the economy. I think that, that makes for a really resilient business overall, even if there are some near-term bumps in the road so to speak. This was interesting. Third-quarter Autoship customer sales. Talking about how customer engagement continues to strengthen. Those Autoship customer sales as a percentage of net sales were up 140 basis points to 70.6%. That was a new high for the company. The average order value for new to Chewy customers was 6% higher on a year-over-year basis and 13% higher on a two-year basis. So clearly people are continuing to shop online for their pets, even though inflation is still a concern with pricing. I had seen a note in the company's second-quarter conference call, several months ago and an analyst or something was asking about is there going to be any deflation in prices as far as putting items on sale? We know a lot of retail stocks, for example, haven't really had to do sales because items, there's a shortage of them and people are willing to pay full price. That's something they were also saying is they weren't really expecting to have to be doing a lot of sales that they were seeing very low momentum in that area. It's interesting and that's also a great way to balance some of the maybe loss of profits from growing the business. Another thing as well, I've been talking about the company's telehealth business. Connect with a vet now accessible by all customers on a paid for consult basis. Chewy has a base of over 20 million customers, which is growing as we speak. You can pay per consult for chat and video, which is great. There's a pricing structure for that. I think if I remember right, it's like $19.99 for a video and $14.99 for chat per visit. If you're on Autoship, that is free of charge. If you aren't on Autoship, you can use that pricing structure and you can connect with a licensed vet 15 hours a day, 365 days a year.
Kalogeropoulos: That is great. As a previous dog owner, I used to own a dog that had a real anxiety problem, especially was really reactive around other dogs so a trip to the vet was really like the worst day of our year kind of thing. So I love the idea. There are some things you can't avoid obviously having to take the pet in person, but if you can avoid a trip occasionally, I could see that being a real good value for customers.
Warren: For sure. This is another thing that I was talking about, was expanding Chewy's total addressable market with the launch of pet insurance. The company's going to be offering an exclusive suite of pet health insurance and wellness and preventative plans in partnership with Trupanion starting early next year. This will make it really easy for customers to get affordable and comprehensive coverage for pet healthcare needs, which without insurance can run in the thousands of dollars in a really easy way. It will utilize Trupanion's proprietary software, but you can purchase it on the Chewy platform. You go to maybe connect with a vet and can also pick up some insurance along the way, which is pretty neat I think.
