Online pet goods retailer Chewy (CHWY -1.49%) is sustaining the momentum it built at the initial lockdown phase of the pandemic. Folks spending more time alone at home adopted pets at a higher-than-usual pace. That led to increased spending and customer acquisition at Chewy.
Pets are typically a long-term commitment, so pets adopted in 2020 are growing larger, eating more, and ripping through more chew toys. The trend lifted Chewy's customer spending to record highs in its most recent quarter, which ended on May 1.
Customers spend more with Chewy over time
Indeed, in the quarter that ended in May, Chewy's net sales per active customer increased to $446. That was up 14.9% from the same quarter in the prior year, and was the highest the metric has ever been. Rising prices forced pet parents to pay more for necessities like food, which pressured purchases of discretionary items like dog beds. The overarching trend for Chewy's customers is that they increase spending with Chewy over time.
The average customer spends less than $200 in their first year with Chewy. That figure rises to $400 in the second year, and eventually to $1,000 annually for the longest-tenured cohort. That's an excellent sign for shareholders that people are spending more as they grow familiar with Chewy.
Overall, net sales increased by 13.7% to $2.43 billion in the quarter ended in May. Management expects a steadily rising trajectory for the rest of the year, forecasting revenue growth of 13.5% at the midpoint of the second quarter and 16% for all of 2022.
Investors liked the news out of Chewy's Q1
The market liked what it saw out of Chewy in the first quarter. The stock has been up more than 20% since the announcement on June 1. Still, Chewy is down considerably off its highs from last year. Rising inflation, combined with supply-chain disruptions, increases businesses' costs and pinches consumer budgets.
In the first quarter, Chewy's net profit margin came in at a better-than-expected 0.8% -- though that was still down 100 basis points from the 1.8% it reported in the same quarter the prior year. Over the past several years, Chewy has done an excellent job using economies in scale to improve profitability. From 2016 to 2021, its operating profit margin improved from a negative 11.9% to a negative 1.3%. Meanwhile, its revenue increased from $901 million to $8.9 billion in that time.
Management has demonstrated that it can effectively expand sales while boosting margins with solid execution. Without understating the challenges of operating a business amid brisk inflation, supply shortages, and a pandemic, investors can reasonably feel confident in Chewy's ability to grapple with the difficulties.
It helps that the company builds customer loyalty over time, which flows into rising sales. The near term may well be volatile, but long-term investors can feel good about investing with Chewy.