Shares of pet e-commerce company Chewy (CHWY 2.07%) fell 13.5% in March, according to data provided by S&P Global Market Intelligence. It was briefly beating the market during the month. But the market didn't like the financial results the company reported on March 29, and the stock plummeted as a result.
For fiscal year 2021, Chewy generated net sales of $8.89 billion, including $2.39 billion in the fiscal fourth quarter. Net sales for the full year and for Q4 were up 24% and 17% year over year respectively. However, these numbers missed the low end of management's guidance by $10 million.
Chewy only grew its active customers by 300,000 during the quarter -- it ended Q4 with 20.7 million compared to 20.4 million at the end of the third quarter. But since revenue was below expectations, it suggests that the company couldn't attract (or perhaps retain) as many people as it originally anticipated.
In light of this, Wall Street analysts were quick to substantially cut their price targets. For example, Jefferies analyst Stephanie Wissink lowered their price target for Chewy stock from $90 per share to $60 per share -- a whopping 33% reduction -- citing the impact of a maturing customer base, according to The Fly.
Likewise, Evercore ISI analyst Mark Mahaney had expected an "inflection point" with Chewy's customer base (among other things) that perhaps won't come until next year. Therefore, Mahaney also substantially reduced the price target for Chewy stock from $97 per share to $57 per share.
For fiscal 2022, Chewy management expects to have net sales of $10.2 billion to $10.4 billion, an increase of 15% to 17% from 2021. Management also expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be right around breakeven. This is comparable to the adjusted EBITDA it's reported in years past.
Part of the reason Chewy didn't gain operating leverage in 2021 is due to inflation. This is reflected in the moderate decline in the company's gross margin -- in other words, the cost of goods went up because of inflation faster than management could pass the added cost on to customers. But in its letter to shareholders, management said, "End pricing is starting to catch up with inflation." That's good.
The other reason Chewy didn't gain operating leverage in 2021 is due to the amount of money it's investing back into its own business. For example, the company's capital expenditures increased 40% year over year to $183 million. That's a lot. But much of this was spent on new fulfillment centers -- crucial infrastructure if it's going to hold its own against e-commerce giants like Amazon.
Chewy might not have entirely lived up to elevated expectations in 2021. However, the company continues to gain ground and build crucial infrastructure even in Amazon's looming shadow, and I think that's reason for cautious optimism for Chewy shareholders going forward.