Chewy  (CHWY) - Get Report went public in June 2019, raising $1 billion in gross proceeds from an IPO in the U.S.

The firm has developed an e-commerce website that enables consumers to purchase pet food and related products.

CHWY has achieved strong growth and customer use metrics, but remains distant from operating breakeven, so my opinion of the stock is Neutral at its current level.

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Florida-based Chewy was founded in 2011 to create a one-stop e-commerce platform for pet products, ranging from foods and treats to healthcare products.

Management is led by CEO and Director Sumit Singh, who has been with the firm since 2017 and was previously general manager and director of Amazon’s AMZN North American Merchant Fulfillment and Third-party operations.

Chewy has a selection of over 50,000 products for dogs, cats, birds, fish, small pets, reptiles, horses, and others.

The company offers a popular ‘Autoship’ subscription that gives its customers an automatic reordering feature.

Below is a brief overview video of one of Chewy’s YouTube marketing campaigns:

Source: Chewy

For the Fiscal Year 2018, Chewy recorded net sales of $3.5 billion, an increase of 68% over its $2.1 billion of net sales for FY 2017, as shown in the following graphic:

chwysales

Source: Company registration statement

The firm has over 10,000 customer support employees to whom it refers to as “Chewtopians” that are spread across 12 locations in the US and ready to support Chewy’s customers 24/7.

According to a 2018 market research report by Hexa Research, the US online pet food and supplies market is projected to reach $6.13 billion by 2025.

The main factors driving market growth are rising pet ownership in the US as well as the benefits of e-commerce shopping, such as convenient shopping, availability of imported pet products, and price comparisons.

Major competitors that operate pet e-commerce platforms include:

CHWY’s topline revenue by quarter has grown impressively over the past five quarters, with Q4 19 representing a 24.4% growth rate over Q4 18:

Source: Company Financials

Source: Company Financials

Gross profit by quarter has also trended upward:

Source: Company Financials

Source: Company Financials

Operating income by quarter has been more uneven and still has a long distance to achieve operating breakeven:

Source: Company Financials

Source: Company Financials

Earnings per share (Diluted) have similarly been uneven over the past five quarters:

Source: Company Financials

Source: Company Financials

In the past 12 months, CHWY’s stock price has risen 104 percent vs. the U.S. Online Retail index’ rise of 15.6 percent and the overall U.S. market’s drop of 7.4 percent in the past 12 months, as the chart below indicates:

chwychart

Source: Simply Wall Street

Commentary

In its last earnings call for FY Q4 and full year FYE 2020, management highlighted its continued investment in private brands (higher margin) and its Chewy pharmacy initiative.

Also, the company expanded the number of fulfillment centers, presumably to reduce delivery times.

Management also touted its autoship functionality, saying that 70% of net sales in Q4 was done through the autoship feature, an impressive statistic.

In 2020, the company’s plans to launch two new fulfillment centers is expected to improve its SG&A cost efficiencies.

Notably, most of the firm’s products, which are foods and treats, are sourced in the U.S., mitigating potential supply chain disruption risks had they been sourced from China. CHWY has not seen ‘material disruptions’ in its operations or supply chain to-date.

As to its financial results, the firm’s revenues for the full year grew by 40% and the number of customers increased by 2.9 million to 13.5 million ‘active’ customers. Average annual sales per customer was $360, an increase of 10.4% year over year.

Gross margin increased by 340 basis points for the year, another positive development.

However, the company still lost $252.4 million for the year, including share-based compensation of $136.2 million, and free cash flow was a slight negative at ($2.1 million) for the year.

Forward revenue guidance for FY Q1 was for year-over-year growth of a midpoint of 36%. Furthermore, as customers pull back on their previous stockpiling behavior, revenue growth may be front-loaded so that the remainder of FYE 2021 may see more tepid growth.

While I like CHWY’s prospects in a post-pandemic world where more people shop online, management has made only minor progress toward operating or EPS breakeven.

There are aspects of CHWY’s execution that are positive, but their operating cost structure is still high, which weighs heavily on profitability as the firm builds out its capabilities.

For investors who are extremely patient, perhaps CHWY is a buy here, but for me, my bias is Neutral until management can prove itself capable of a serious turn towards profitability.

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