Chewy (CHWY 4.10%) reported fourth quarter and fiscal 2021 results after the market closed on Tuesday, March 29. The news disappointed shareholders, and the stock was down 15% on the day following the announcement. Chewy's stock has been under pressure for several months as the coronavirus pandemic has turned from a tailwind into a headwind.
At the onset, Chewy benefited from a surge of new customers and spending. However, now that economies are reopening, customer growth is slowing. Meanwhile, the pandemic is causing supply-chain disruptions worldwide, creating shortages and raising prices on everything from wages to shipping.
Fortunately for shareholders, Chewy says the worst of the headwinds are behind it, and it is already seeing improving conditions.
Chewy sees headwinds to gross profit margins easing in Q1
In its fiscal fourth quarter, which ended Jan. 31, Chewy said sales increased by 16.9% to $2.4 billion. The sales growth rate was a deceleration from earlier in the pandemic. In the fiscal year ended in 2020, Chewy's sales increased by 37.2% and then by 47.4% in the fiscal year ended in 2021. Chewy is an online retailer, so it's no surprise that it thrived during the beginning phases of the pandemic when lockdowns were more common and folks were more hesitant to leave their homes.
Rising sales steadily increased Chewy's gross profit margin from 16.6% in 2016 to 25.5% in 2021. Investors were concerned about the metric going into the fourth quarter. Management had been vocal about the pressure on profit margins resulting from the headwinds of the pandemic, so shareholders were bracing for the impact.
All in all, Chewy's gross profit margin declined by 170 basis points year over year to 25.4% in the quarter ended in January. Chewy attributed the contraction to rising inbound freight costs and its patient policy toward raising its own prices to consumers. Thankfully, management observed the headwinds ease at the end of the fourth quarter.
"We believe that these near-term pressures on gross margin likely peaked in the fourth quarter, and we are already seeing signs of recovery in the current quarter. For instance, in February 2022, the first month of our first quarter, we saw a sequential improvement in gross margin," the company said in its fourth-quarter shareholder letter.
What this could mean for Chewy investors
In the near term, volatility in profit margins is likely to persist. The effects of the pandemic are unpredictable, and competition for labor remains elevated. Still, management reiterated its confidence to drive gross profit margins toward the higher end of its long-term target of 25% to 28%.
Meanwhile, the stock is down 63% off its highs reached in early January 2021 as the market is not convinced the pressures on profits will be short-lived. That creates an opportunity for long-term investors to scoop up Chewy shares at a significantly lower price, which may not last very long.