The odds were stacked against Chewy (CHWY -1.36%) going into the company's fiscal 2022 first-quarter earnings report (for the three months ended May 1) thanks to multiple tailwinds such as a broken supply chain, surging inflation, and a labor shortage, but the online retailer of pet products and supplies overcame those challenges to deliver a solid earnings report on June 1.
Chewy stock surged 24% in extended trading following its results as investors were surprised that the company posted a profit when analysts were looking for a loss. However, there was a chance of Chewy delivering stronger-than-expected results as management had hinted toward improvements in the business environment earlier this year.
Chewy delivers a surprise profit
The good part is that those improvements paid off for Chewy last quarter. Chewy's fiscal Q1 revenue increased 13.7% year over year to $2.43 billion, which was the higher end of its guidance range and exceeded the consensus estimate of $2.41 billion. The e-commerce specialist delivered a profit of $0.04 per share, which was a major surprise as Wall Street was looking for a loss of $0.11 per share.
There were a couple of reasons why Chewy was able to deliver stronger-than-expected results. First, the company witnessed healthy growth in customer spending last quarter, with net sales per active customer (NSPAC) increasing 15% year over year to $446. The number of active customers increased 4.2% year over year to 20.6 million.
Second, Chewy shored up its supply chain last quarter, which led to sequential growth in the company's gross margin. The company's new outbound freight contract helped it improve its on-time delivery performance to customers by eight percentage points on a quarter-over-quarter basis. Chewy was able to improve customers' shopping experience and reduce costs simultaneously because of its supply-chain improvement initiatives.
More specifically, Chewy's gross margin increased 210 basis points on a sequential basis. The metric remained flat on a year-over-year basis, which is impressive considering the higher input costs the company is facing.
Meanwhile, a look at a few key metrics from Chewy's latest quarterly report indicates that it is on its way to winning big from growth in the online pet products and supplies market.
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These numbers point toward a bright future
We have already seen that Chewy's active customers increased their spending on the company's platform last quarter, and this is a trend that's likely to continue. That's because Chewy's customers start spending more on its offerings the longer they remain with the company. According to the data shared in Chewy's latest shareholder letter, customers are seen "spending less than $200 in their first year, over $400 by their second year, approximately $700 by their fifth year, with our oldest cohorts spending nearly $1,000 per year."
Chewy had 13.5 million active customers at the end of fiscal 2019 (ended Feb. 2, 2020), which was just before the pandemic struck. The company has increased its active customer base by 52% since then, adding close to 7 million customers in just over two years. The ramp-up in spending by these customers should be a tailwind for Chewy's revenue and margins.
The growth of the subscription model is another example of Chewy building a sticky customer base. The Autoship program, which allows Chewy customers to schedule deliveries of pet products, accounted for 72.2% of the company's top line last quarter, up from 69.3% in the prior-year period. All of this indicates that Chewy is building a sustainable, long-lasting revenue stream.
More importantly, increased online shopping for pet products should be a secular growth driver for Chewy. According to a third-party report, the size of the market for pet products in the U.S. could hit $93 billion by 2025 as compared to $60 billion in 2015. Meanwhile, the e-commerce channel is expected to account for 55% of projected pet food sales by 2025, which would be an improvement over last year's 37%.
As a result, Chewy's end market could grow substantially in the future. Throw in the fact that Chewy commands a robust share of this market, and it won't be surprising to see the company's top and bottom lines grow at a nice pace in the long run. That's why it would be a good idea for investors to buy Chewy stock following its quarterly report.
Chewy is trading at just 1.1 times sales right now, representing a nice discount to the S&P 500's sales multiple of 2.6. An acceleration in this e-commerce company's growth could lead to a healthy stock price upside, which is why investors may not want to miss the opportunity to buy it while it is still cheap.
