With many bricks-and-mortar pet stores closed due to the coronavirus, online-only pet supplies retailer Chewy Inc. reported record growth in sales and new customer acquisition in its fiscal first quarter ended May 3.
Sales increased 46.2% to $1.62 billion, and for the first time, the e-retailer sold more than $1 billion through its auto-ship program to pet owners who sign up for automatic replenishment of pet food and supplies.
The company also added 1.6 million new customers, double the average quarterly growth rate, bringing the number of consumers who have purchased in the past year from Chewy to 15 million.
“The behavior shown so far by new customers is promising,” CEO Sumit Singh told investment analysts Tuesday. He said their initial orders were 11% higher than those of new customers acquired prior to the coronavirus outbreak, a higher percentage are returning to make a second purchase and the average value of second purchases is 5% higher than those of earlier customers won to Chewy.
While pet adoption data is imperfect, from what Chewy can tell, U.S. consumers adopted pets at a 60% higher rate in March and April than normal, Singh noted. One sign of that turn to pet adoption during the pandemic was that one-quarter of customers who created profiles of their pets on Chewy.com in the first quarter described their pets as puppies and kittens.
And those pet parents tend to make higher purchases from Chewy, he said.
“When you look at that kind of customer, the kind of baskets they build are a richer basket because you need a full array of food and supplies, but also hard goods,” such as crates, collars, food bowls and leashes.
Higher sales and expenses from coronavirus
Chewy estimated that it gained about $70 million in additional sales from customers stocking up on pet supplies as shelter-at-home orders took effect. The company also absorbed about $20 million in coronavirus-related costs, including higher pay and bonuses for hourly employees and increased cleaning costs for its offices and warehouses.
The online retailer hired 4,600 new employees in the first quarter, in part to handle the surge in sales as well as for its new fulfillment center—the company’s ninth in Salisbury, North Carolina. In the second quarter, the company hired an additional 1,400 hourly workers, meeting its target for the year of adding 6,000 hourly workers.
Chewy plans to open its tenth fulfillment center in Archibald, Pennsylvania, later this year.
Chewy hits a profit milestone
While the company lost $48 million in the quarter compared with $30 million in the same quarter a year earlier, its gross margin increased to 23.4% from 22.9% a year earlier. Contributing to that increase in profit margin were higher sales, more revenue from its private-label products and lower marketing costs as many retailers pulled back from advertising amid the virus outbreak, reducing Chewy’s online and offline ad spend. In addition, Singh said, more consumers navigated directly to Chewy.com, reducing the need to advertise to boost sales.
As a result of these developments, Chewy for the first time went into the black for the quarter in adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA, which among other items excluded $42.3 million in stock-based compensation, was $3.4 million for the quarter, compared with a loss of $15.8 million in the prior-year period.
Pet ownership trends favor Chewy
Responding to a question about whether Chewy plans to expand internationally, Singh said the company is holding to its plan to go abroad no sooner than 1 year from now and not later than 5 years. He emphasized the big opportunity Chewy has in the U.S.
“We believe there are three trends going on right now that meaningfully accelerate our position to play in this space,” Singh said. Without disclosing the sources of the data, he said that pet spending per U.S. household is increasing by 5% a year and pet ownership by 1-2%. “Three, what we’ve seen with this pandemic that the online penetration projections have increased from 25% penetrated through 2024 to north of 35% penetrated,” he said.
He said Chewy’s 17,000 employees remain focused on U.S. expansion. “From a people, process, infrastructure and tech perspective, we’re aligned and focused on the United States and on this massive opportunity,” Singh said.
Chewy provides financial guidance
While some other retailers have declined to provide financial guidance for the rest of 2020 because of uncertainties stemming from the coronavirus, chief financial officer Mario Marte said Chewy is confident enough of its projections to offer guidance. He projected Q2 sales of between $1.62 billion and $1.64 billion, an increase of 40-42% over Q2 2019, and full-year sales of $6.55 billion to $6.65 billion, a year-over-year increase of 35-37%.
Chewy became a publicly traded company in 2019, but its largest shareholder remains PetSmart Inc., which acquired Chewy in 2017 for a reported $3 billion. Including Chewy’s online sales and its own, PetSmart is No. 19 in the 2020 Digital Commerce 360 Top 1000.
For its fiscal first quarter ended May 3, Chewy reported:
- Net sales of $1.62 billion, an increase of 46.2% from $1.11 billion in the same quarter a year ago.
- Autoship sales to subscription customers of $1.10 billion, up 48.0% from $743.9 million a year earlier.
- Net sales per active customer of $357, an increase of 6.6% from a year earlier.
- A net loss of $48 million, an increase of about 60% from $30 million in the year-ago quarter.
- A negative free cash flow of $22 million, an improvement from a negative free cash flow of $63 million a year ago.
- Adjusted EBITDA of $3.4 million versus an adjusted EBITDA loss of $15.8 million a year earlier.
Percentage changes may not align exactly with dollar figures due to rounding.