What happened
Shares of pet e-commerce company Chewy (CHWY 2.99%) gained 33.8% in June, according to data provided by S&P Global Market Intelligence. Most of these gains came on the first day of the month after the company reported strong financial results. The rest of the month, Chewy stock traded roughly in line with the S&P 500.
So what
Chewy released financial results for its fiscal first quarter of 2023 on May 31 after the market closed, so the stock's jump didn't happen until June 1. The company had many things to report for the three-month period that ended in April. However, I believe the market was most excited about its profitability.
In Q1, Chewy generated $127 million in free cash flow. For perspective, it generated $130 million in free cash flow in 2020, 2021, and 2022 combined. In other words, in the latest three months it made almost as much as it had during the previous three years -- that's a big deal.
Profitability is rising for Chewy thanks to years of investment in its fulfillment center network -- specifically with automated fulfillment centers. As an e-commerce company, having fast shipping is imperative, which necessitates a logistics network. However, the company has automated four fulfillment centers as of the end of Q1, which leads to better profitability in this area.
The other bright spot for Chewy in Q1 was its sales metrics per customer. The average customer spent $512 over the past year, an increase of almost 15% year over year. Part of the company's success was credited to gaining a larger share of consumers' wallets.
Chewy hopes to gain greater wallet share in the future with other products and services in the pet category beyond its core e-commerce operations. This includes health services, and there was progress on this front in June as well. Chewy has partnered with Lemonade and Trupanion to offer insurance plans to pet owners. And on June 26, it announced new pricing tiers and expanded coverage by entering new U.S. states.
Now what
If there's a concern from its Q1 financial results, it's Chewy's customer count. The company ended the quarter with 20.4 million active customers, which was down almost 1% year over year. Its growth, therefore, was entirely attributable to higher spending per active customer. Ideally, Chewy would still be adding new customers.
Chewy is consequently expanding into Canada looking for new customers. Management believes that operations in Canada can provide similar profit margins to its U.S. business in time. That said, the company's financial results could look different in coming quarters as it invests in international growth. And it may take some time before Canada or other international markets are as profitable as its business now is in the U.S.
Therefore, there was important progress for Chewy in June. But I'm not sure how consistent its free-cash-flow generation will be in coming quarters as it further invests in growth.
