Chewy (CHWY 2.99%) provides products and services that help pet parents take good care of their animal loved ones. As an online business, the company can closely track its operations. There was a split in performance during the second quarter of 2023 that investors should monitor. But the end results were still quite good. Let's review.
Chewy lost customers
To get the bad news out of the way right up front, Chewy had 20.4 million active customers in the second quarter. That was down 0.6% year over year. While not a huge decline, it's hard to grow a retail business if you're losing customers.
Image source: Getty Images.
There are any number of reasons this could be happening, but management highlighted two specific industry trends as headwinds. First, "pet household formation remains relatively muted." Second, "the consumer mindset continues to be pressured." These are probably related and suggest that economic concerns have left people pulling back. This is not something Chewy can control, but it makes sense that it would have an impact on the company's active customer count.
That said, management was still able to grow aspects of the business in important ways. For example, the company has been working to grow the share of wallet it has with each customer. An example is the company's pharmacy operations, which have grown to 20% of the retailer's active customer base. The more customers Chewy has buying more things, the better it is for the business and shareholders.
How Chewy grew its top line
That brings us to the really good news in the quarter; the company's average customer brought $530 worth of pet supplies from Chewy in the second quarter. That was up a huge 14.7% year over year. So while the customer count fell a little, Chewy's loyal fans are becoming even more loyal.
This nice increase led the company's top line higher by 14.3% to $2.78 billion. That's impressive revenue growth for a retailer. To be fair, price increases related to inflation were probably a big part of the story here, so investors shouldn't expect these kinds of numbers in perpetuity, and the news may not be quite as good as Chewy would like investors to think.
However, it's worth noting that consumable products such as food and medication make up around 85% of Chewy's business. That means its customers have to keep coming back again and again to refill their food bins and medicine chests. The only other options are to get rid of their pets or find another source for the products being bought.
CHWY Revenue (Quarterly) data by YCharts
What to watch at Chewy
There are a number of trends that shareholders need to monitor today. Without more customers, Chewy's long-term growth can only go so far. Short-term weakness probably isn't something to worry about, but if the trends turn negative over a long period, this niche retailer may have problems.
To some extent, Chewy can keep growing if it keeps increasing its sales per average customer. The current growth rate on this metric is probably benefiting from inflationary price increases, so expect slower growth in the future. But if the number starts to materially weaken, perhaps even going down, the company will be in a potentially bad spot.
The real risk, of course, is if customer count and average sales per customer drop at the same time. While a quarter or two of that trend isn't terrible, a long-term downtrend in both would be devastating to this online pet retailer's business. Investors should keep a close eye on all of these metrics.
