Chewy's (CHWY -2.79%) fourth quarter was an overall disappointment. Once a significant tailwind, the coronavirus pandemic has become a headwind for the pet retailer. Supply-chain disruptions, labor shortages, and rising inflation hurt profit margins.
Meanwhile, economic reopening is dampening customer acquisition as folks have more options on where they can spend money. However, there is one bright spot in Chewy's Q4 report that investors should not overlook.
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Existing customers are spending more at Chewy.com
Net sales per active customer increased to $430 in Q4 ended Jan. 31. That was up by 15.6% from $372 per active customer in the same period last year. In other words, existing customers are increasing their spending on Chewy.com, a bright spot to be sure. Chewy has been working on expanding item availability, and it's paying off. Of course, more options for existing customers can have the effect of boosting sales per customer. Otherwise, consumers may split their overall pet spending needs between several retailers.
Fueling that growth is an excellent customer value proposition. Shopping online is more convenient than going to a brick-and-mortar store in person. It saves individuals the time and resources needed to travel to the closest pet store, search the aisles for the products they need, wait in line to check out, and return home. Further, Chewy's auto-ship program gives pet parents the ability to automate the process altogether. A big part of pet spending happens repeatedly; Rover needs his food and medicine every month. Indeed, in Q4, 70.7% of overall sales on Chewy.com were through auto-ship. That high percentage of spending highlights just how much consumers value this option.
Chewy's sales increased by 16.9% year over year in Q4 to $2.4 billion. Admittedly, the growth rate was a deceleration from the peak levels at the initial stages of the pandemic. Still, it was already conceded that most of the results from the quarter were a disappointment. Adding to the list of negative factors was a 170-basis-point decline in gross profit margin from the previous year. It all flowed to a return to losses on the bottom line of $63.6 million. Chewy had turned the corner on profitability, reporting a net income of $21 million in Q4 last year.
The market focused on the bad news
The market focused on the bad news in Chewy's Q4 results, of which there was plenty, as mentioned above. The stock was down 16.5% on the day following the announcement. Overall, Chewy's stock has been down a whopping 64% off its highs in early 2021.
Thankfully, management sees some of the headwinds rising from the pandemic turning around for the better. Brave investors willing to weather the near-term challenges can buy an excellent company at a discount price. Chewy has proven it can grow revenue and expand profit margins over the years, so investors can reasonably assume management can overcome the current challenges given enough time.
