Investors were hungry for some good news heading into Chewy's (CHWY -6.07%) first-quarter update. The pet supply e-commerce giant had been reporting slowing growth and increasing net losses in the wake of its pandemic-related demand spike through most of 2021. Wall Street sent the stock lower on concerns that these issues will keep hurting the business through the rest of this year.
Chewy's latest operating report eased several of these worries, but not all of them. Let's take a closer look.
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Sales are rising
The main concern heading into the announcement was that sales trends would continue slowing compared to a year ago, when consumers were more focused on e-commerce shopping. Chewy also revealed a distressing drop in customer retention last quarter, which management predicted would fix itself over the next few quarters.
The report contained positive signs backing up that bullish prediction. Chewy's sales rose 14% on top of a 32% spike a year ago. Executives said in a shareholder letter that customers were highly engaged with the platform with average annual spending hitting a record $446. "Fiscal year 2022 is off to a good start," CEO Sumit Singh said.
Management added context around customer retention, explaining in a conference call that growth in spending from established pet-supply shoppers more than offset normal attrition from newer customers. "We are focused on engaging with the high-value customers ... who will provide us with long-term record revenue streams," Singh said.
Cost management
Chewy's business was pinched by supply-chain and inflation challenges. But the combination of charging higher prices and cost cuts allowed gross profit margin to rise compared to the prior quarter and stay flat compared to a year ago. Chewy's net profit landed at 1% of sales compared to 2% a year ago. Operating cash flow remained positive but declined slightly as well.
CHWY operating margin (TTM). Data by YCharts. TTM = trailing 12 months.
Management is hoping to get gross profit margin up to 28% of sales over time, and the success it achieved so far in 2022 suggests that this target is easily achievable, even under the current tough inflation conditions.
Looking ahead
Investors breathed a sigh of relief when Chewy announced a generally positive outlook for the rest of the year. Sales should rise between 13% and 14% in the second quarter, representing a stabilizing trend after several quarters of slowdowns.
Chewy reiterated its full-year outlook that implies solid growth, too, with revenue rising by as much as 17% this year following last year's 24% increase. Gross profit margin should rise slightly to about 27% of sales.
Altogether, these metrics reflect Chewy's attractive selling model that benefits from over 70% of its customers opting for its subscription-based pet supply services. The business has a bright future as it adds new customers and attracts more spending each year from its established auto-ship clients.
