The coronavirus eats into Chewy's margins. H&M considers job cuts. Adidas seeks more than $1 billion in state aid.

(Bloomberg)—Chewy shares fell before the opening bell Friday as analysts see the online pet-products retailer’s recent boom from people flocking to its site in the era of social distancing coming at a cost, along with uncertainty related to its withdrawn guidance.

Shares fell as much as 3.7% in pre-market trading following the company’s fiscal fourth-quarter earnings report late Thursday.

“While the coronavirus has been a boon for (Chewy’s) demand and sales growth, we see a few dynamics that will weigh on margins in the quarter,” Wedbush analysts led by Seth Basham said in a note. And “investors may be uneasy that the company refrained from providing 1Q profit guidance or full-year 2020 sales or profit guidance given the fluid coronavirus crisis.”

Chewy shares have risen 21% this year through Thursday’s close, as the Dania Beach, Florida-based company has been among the few beneficiaries amid the coronavirus outbreak that’s closed stores, curtailed travel and caused other business disruptions. But analysts see the recent surge also crimping the company’s margin expansion as it ramps up hiring and offers incentives for existing employees to work more hours to keep up with demand. Chewy is owned by PetSmart Inc., No. 26 in the 2019 Digital Commerce 360 Top 1000.


Here’s what analysts are saying:

Jefferies, Brent Thill: While Chewy “continued a recent trend of sales and gross profit driven upside, favorable 1Q guidance appears largely the result of COVID-19 and provides little insight into long-term growth potential.”

The “stickiness of recently acquired customers are difficult to predict and will likely play a large role in CHWY’s eventual results.”

Meanwhile, the firm noted that the company mentioned “a few dynamics that may result in a slowdown in recent margin expansion, including a near-term mix shift to lower margin consumables from COVID-19 and uptick in hiring ahead of anticipated demand.”


Still, the “material uptick in hiring,” which represents a 50% to 85% increase in headcount, “could indicate top-line growth acceleration.” And the company “earned its status as a near-term safe haven, benefiting from COVID-19 as people’s desire to avoid crowded areas facilitated an acceleration in the shift from offline to online.”

Wedbush, Seth Basham: Hiring more workers and giving current employees overtime pay and other incentives due to the additional hours needed to fulfill demand will weigh on margins in the quarter. Also, additional cleaning measures are being taken in light of risks related to the outbreak, which will likely lower delivery efficiencies.

Along with inefficiency from rapid hiring, “a sales mix shift to consumables could slow margin growth in the near term,” though the firm expects 150 bps of operating margin improvement in the first quarter and the company to inflect to positive adjusted Ebitda.

Still, the “stay-at-home” period is “likely to accelerate the secular shift to online shopping for essentials such as pet food.” While it is too early to be sure, new customers so far are “behaving similar to prior cohorts of new customers, suggesting they will be ‘sticky,’ driving sustained revenue growth.”


“Beyond the benefits from shifting customer behavior, we note that CHWY is making strong progress in building efficiencies in its fulfillment and customer acquisition,” the firm said.

William Blair, Dylan Carden: “Chewy’s fourth quarter 2019 sales, gross margin and adjusted Ebitda were all ahead of expectations, rounding out consistent upside throughout the year, and reinforcing major themes we believe will continue to provide upside to both sales and earnings expectations in the years to come.”

The firm expects the trend in sales growth, which has come in “modestly ahead of expectations in each quarter,” to continue “as online migration in the pet space accelerates, turbo-charged by recent lockdowns that grow awareness and comfort of the channel.”

The firm does not see the recent surge in demand to be a “one-time benefit,” as the company “has a strong track record of fostering customer loyalty to leverage the recent influx of new customers,” among other factors. The firm also sees “this period of heightened demand, while straining near-term margins,” to “likely result in greater operational efficiencies and learnings on the back end.”


However, “combined with likely some disappointment on the near-term revenue guidance versus the limited early numbers, we believe lack of guidance could pressure shares in the more immediate term.”

RBC Capital, Mark Mahaney: With Chewy shares “dramatically outperforming the market and the sector,” the company “needed to put up very strong results. We believe they did.”

Sees fundamental trends being “positive, with revenue growth decelerating 5 points to 35% y/y, but gross margins solidly expanding y/y and Ebitda loss improving to a record low.”

“In this crisis, there are very, very few beneficiaries. But online shopping, especially of consumer staples and necessities such as pet products, is almost surely one of those.”


H&M forecasts loss and considers job cuts

Hennes & Mauritz AB (No. 29)  said governments aren’t doing enough to help as three-quarters of the Swedish clothing retailer’s stores remain shut due to the coronavirus pandemic, making job cuts necessary.
Sales fell 46% in local currencies in March, the first month of H&M’s second quarter, which the fast-fashion maker said will be unprofitable. The company is considering ways to raise debt financing to improve its liquidity as it reduces working hours for tens of thousands of employees. The stock, which has lost a third of its value this year, gained 6% as of 9:10 a.m. in Stockholm.

The crisis is striking H&M just as the retailer started to see some light at the end of a tunnel after a four-year downturn. The company just got a new CEO at the end of January, when Helena Helmersson replaced the grandson of H&M’s founder. To show some solidarity, she imposed a 20% temporary pay cut on top management.

Helmersson said Friday H&M appreciates the support measures that countries have announced to help retailers, though more will be needed.

H&M needs to make tough choices, reviewing costs in purchasing, investments, rents and staffing. The retailer said 1,000 store leases are up for renegotiation this year, and it has been threatening to withhold rent payments and step out of some contracts. H&M said it aims to cut operating costs by as much as 25% in the second quarter.


Stock-in-trade declined by 12% adjusted for currencies to 37 billion kronor as H&M has spent years trying to reduce an inventory buildup that has weighed on results. The company warned inventory will increase temporarily, though that should return to normal as demand recovers.

Adidas seeks more than $1 billion in state aid

Adidas AG (No. 36) is seeking more than 1 billion euros ($1.1 billion) in German government aid as it grapples with the fallout of the coronavirus pandemic, people familiar with the matter said.

The sporting goods maker is in talks with German state-owned bank KfW about a financing package, according to the people, who asked not to be identified because the information is private. Adidas has been discussing a range of around 1 billion euros to 2 billion euros in loans, though the final amount and timing haven’t been decided, the people said.


Shares of Adidas fell as much as 4.9% Friday. They were down 3.9% at 2:55 p.m. in Frankfurt, making the company the worst performer on Germany’s benchmark DAX index, which was little changed.

Adidas said this week it’s reversing an earlier decision to not make April rent payments for its shops in Germany following a public backlash. Most non-food retailers in Europe’s largest economy are closed until at least April 20 to stop the further spread of COVID-19.

Chief Executive Officer Kasper Rorsted recently told a German newspaper that while the company won’t need direct government support, Adidas and the economy as a whole will need credit. A representative for Adidas declined to comment further. A representative for KfW also declined to comment.

The state-owned bank launched a loan program on March 23 to help companies facing a liquidity shortage. About 2,500 companies have applied for loans totaling 10.6 billion euros.


Tour operator TUI AG said last week it secured a 1.8 billion-euro loan from KfW in one of the biggest bailouts in Germany so far. Consumer electronics retailer Ceconomy AG is also among firms that are seeking to participate in the program, Bloomberg News has reported.