Shares of Chewy (CHWY 0.25%) crashed 16% following the release of the company's fiscal 2021 fourth-quarter results on March 29 as investors were spooked by the online pet products retailer's slowing growth and larger-than-expected loss.
The company delivered Q4 revenue of $2.39 billion, up 17% over the prior year but slightly lower than the $2.4 billion consensus estimate. Chewy also swung to a net loss of $0.15 per share compared to earnings of $0.05 per share in the prior-year period. Wall Street was looking for a smaller loss of $0.08 per share.
Let's look at the reasons behind Chewy's predicament.
Factors out of Chewy's control
Chewy is struggling due to supply-chain and labor-related challenges, which have led to lost sales for the company as well as elevated costs. CEO Sumit Singh said on the latest earnings conference call that "the impact from lost sales in the quarter was twice as high as we forecasted." The company blamed the omicron variant of the novel coronavirus for disrupting an already-broken supply chain during the quarter and leading to higher-than-normal, out-of-stock levels as far as inventory was concerned.
Chewy estimates that its quarterly sales would have been at the higher end of its guidance range if it had enough stock to satisfy demand. Meanwhile, elevated shipping and labor costs are pressuring the company's bottom line. Chewy's operating expenses as a percentage of sales increased 190 basis points year-over-year in the fourth quarter to 28% on account of higher labor costs.
The company had to increase the number of employees at its fulfillment centers to cover for those who were out sick during the omicron surge, and Chewy's results will continue to be impacted by these challenges in the current quarter. The company expects revenue of $2.40 billion to $2.43 billion in the first quarter of fiscal 2022, an increase of 12% to 14% over the prior year.
The full-year guidance calls for $10.1 billion in revenue at the midpoint of the range, an increase of 16% over fiscal 2021. That points toward a significant reduction in Chewy's growth this year following last year's revenue increase of 24%, and explains why investors pressed the panic button after the results were released.
However, there were a few silver linings for Chewy during the quarter that savvy investors shouldn't miss out on as they indicate that the company is pulling the right strings to tap into a massive end-market opportunity.
The big picture is still bright
Chewy estimates that it has a total addressable market (TAM) worth $120 billion within the pet products and supplies market. Within this TAM, the share of the online channel is set to grow at a nice pace in the coming years. Market research firm Packaged Facts estimates that the online channel accounted for 36% of the pet food and supplies market last year, a share that's expected to go up to 54% by 2025.
So demand for Chewy's products is going to remain robust in the long run as the end market expands. Chewy has built a sticky customer base already to make the most of the online pet retail market. The company ended fiscal 2021 with 20.7 million active customers, an increase of 7.6% over the prior year. More importantly, its net sales per active customer (NSPAC) increased 15.6% during the quarter to $430, which was a record.
The increase in NSPAC means that Chewy customers are spending more on the e-commerce platform. This metric should continue to increase in the future as Chewy points out that its customers spend more money on the platform over time. In fact, Chewy's oldest customer cohorts are now spending close to $1,000 each year with the company.
It is also worth noting that the majority of Chewy's revenue comes from the subscription channel. The Autoship subscription business generated nearly 71% of the company's total revenue last quarter, which means that the company has already built a loyal customer base. What's more, Chewy is on track to launch a loyalty program for its customers next year, a move that could help drive stronger wallet growth among customers.
The company is also going to diversify its revenue stream with the addition of sponsored advertisements on Chewy.com in 2023, which will allow Chewy's suppliers to target the 21 million active customers it has with relevant ads. Chewy believes that this move will bring "high-margin revenue to our business."
All of this indicates that Chewy's future remains bright despite the near-term challenges that it is facing. Patient investors should consider taking advantage of Chewy's drop to buy more shares, as it is trading at just two times sales despite reporting decent growth and having solid prospects ahead of it. Chewy looks like a value stock as it is trading at a nice discount to the S&P 500's sales multiple of three, and it may not be available for such a cheap valuation once the near-term headwinds fade and growth starts picking up.