Chewy (NYSE: CHWY), a pet-focused e-commerce retailer, gets mediocre-at-best satisfaction ratings from its employees. A cursory look at those scores might give investors a poor impression of the business. But shying away from investing in Chewy based on just this one metric may turn out to be a lost opportunity for long-term investors.
Why invest in a business if its employees don't enjoy working there?
Chewy has quickly emerged into a go-to place for over 20 million pet owners to shop for pet food, treats, toys, or other items for their pets. But at first glance, its employees don't seem to share its customers' enthusiasm. On the popular employee review website glassdoor.com, Chewy's employees give it a less-than-flattering overall rating of 3.4 stars.
Image source: Getty Images.
The other headline number that stands out immediately is the CEO's approval rating of 67% -- again, not encouraging. It's possible that investors checking out those ratings may rethink their plans to invest in Chewy.
Don't judge this book by its cover
Look past the company's rating right now; instead, check out where that number was, and where it's headed. In early 2020, the employees gave Chewy a dismal 2.8 star rating. That is an impressive surge in a fairly short period of time, and it came during the considerable adversity of the COVID-19 pandemic.
And if we unpack the overall rating number, we see that employees' outlook on critical factors such as work-life balance, compensation, senior management, and career opportunities has improved notably during the same period. It looks like Chewy is headed in the right direction as far as employee engagement and culture are concerned.
Source: Employee ratings from Glassdoor.com. Ratings are approximate values.
A good fit, contrary to initial impression
Ryan Cohen co-founded Chewy in 2011, and eventually sold the company to PetSmart in 2017. Current CEO Sumit Singh took over the reins in early 2018, and led the IPO process in 2019 to take the company public, raising over $1 billion. As the employee ratings in the early public days of the company suggest, Chewy experienced some growing pains as it transitioned from operating under a well-established retailer to standing alone as a dynamic e-commerce company. Change can be hard, and challenges during such transitions are not uncommon at all.
Although Singh's overall employee approval leaves room for improvement, he is uniquely positioned to lead Chewy successfully. Before Chewy, Singh served as the worldwide director for Amazon's consumables business, and general manager for its North American merchant fulfillment and third-party businesses. Singh's experience at Amazon is an especially good fit for his role at Chewy as the company builds its network of fulfillment centers to ship products to its customers quickly, reliably, and cheaply. This efficient network creates a major moat for Chewy against its competitors, especially those in their early stages. Sumit Singh is leading the company well here, and Comparably -- an independent website to rate and compare companies and their leaders -- named him one of its best CEOs of 2020.
A convenient one-stop shop
Chewy's employee reviews on glassdoor.com over the recent 12 months or so suggest a steady effort to create a welcoming and equitable work environment at the company. Chewy also received Comparably's award for best culture in 2021. An improving culture seems to be driving greater employee engagement, and leading to brighter business outcomes for Chewy.
Chewy first established itself as a pet food seller, and has now expanded to offer 45,000 items from over 2,000 different brands. In addition to pet foods and other pet care items, the company offers virtual healthcare services for pets with 24-hour expert support, and also delivers pet medications. Chewy also recently partnered with Trupanion to offer pet health insurance to its customers.
The company's autoship model -- where customers set up recurring purchases for discounted prices -- also has been very successful, accounting for over 70% of the total sales for the first three quarters of fiscal 2021. Chewy also offers 100% satisfaction guarantee on every order. Additionally, the company creates a personalized service for pet owners with gestures such as sending birthday cards for pets, or sending flowers to pet owners when the pet passes away. Overall, Chewy's quality, reliability, speed, and convenience have burnished its brand and made its the relationship with its customers more sticky.
Chewy's increasing dominance is evident in its growth and improving profitability. For the first three quarters of its fiscal 2021, the company expanded its active subscribers by almost 15% year over year to over 20 million, and grew sales by over 27% to $6.5 billion year over year. Customers on an average spent $419 with Chewy, 15% more than the prior-year period. The company generated about $122 million in free cash flow for the first nine months of fiscal 2021, compared to $2 million for all of fiscal 2020 -- representing a massive 6,600% jump in free cash flow margin, which measures how much of the revenue the company is turning into cash after paying its crucial bills.
Chewy faces stiff competition from Amazon and other all-purpose retailers, but its differentiated experience and steady sales and profitability growth suggest that it can overcome that challenge. Improving employee happiness appears to be leading to brighter outcomes for Chewy.
Take a closer look at Chewy
Employees' feelings about their employer can tell you a lot about the company's prospects. Chewy certainly has room for improvement on factors that are critical to employee satisfaction, but it seems to be on the right track to fix them, and executing very well. Dismissing Chewy purely based on one headline number can be detrimental to investors' returns. With broader-market jitters currently pushing its shares down over 60% from its 52-week high in March 2021, Chewy may present an attractive opportunity for long-term investors.
