Chewy Inc (NYSE:CHWY) traded to the downside despite hitting the wires earlier this week with a nice beat-the-number result, and guidance pop that didn’t seem to be embedded in the expectations. One might chalk it up a bit to the “reopening” theme, as pure-play e-commerce opportunities start to give back a taste of their extraordinary gains during the pandemic lockdown. In this case, we have the premier pet food e-commerce idea in the market. That said, the stock priced in quite a shift in behavior, reopening may start to shift that behavior, and the topline performance may represent an exaggerated sense of demand due to forward-pull demand through hoarding.
The stockpiling process (with supply chain fears and China a heavy supplier for pet resources, it makes perfect sense) may have pulled forward some demand. However, guidance remains conservative and the company seems to offer a sticky service for a business that has multiple tailwinds.
We would note that CHWY is not yet profitable – it reported a loss of $(0.12) per share in Q1 (Apr). However, that number came in a nickel above expectations, and it was also the company’s best quarter relative to analyst guesses so far on record since its IPO about a year ago.
The company also hit its first plus sign on EBITDA, and saw more than 46% in top-line y/y growth ($1.62B, far surpassing the $1.5B target).
So, that begs the question: why didn’t we see a big rip off the print with such a nice quarter?
As noted above, the big factor is probably a combination of embedded expectations, a new sense of reopening for in-store sales of products like pet supplies, and some sense that people stockpiled pet food (which stores well) in fear of having trouble accessing it if the virus situation worsened dramatically – ie, those sales were simply pulled forward. That means the current quarter may have been exaggerated in its apparent strength, and the factors that may have supported could be receding.
Approach with caution.
Chewy Inc (NYSE:CHWY) bills itself as a company that, together with its subsidiaries, engages in the pure-play e-commerce business in the United States.
The company provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its chewy.com retail Website, as well as its mobile applications. It offers approximately 60,000 products from 2,000 partner brands.
The company was founded in 2010 and is headquartered in Dania Beach, Florida. Chewy, Inc. is a subsidiary of PetSmart, Inc.
Our CHWY Earnings Summary:
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Chewy beats by $0.05, beats on revs; guides Q2 revs above consensus; guides FY21 revs above consensus
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Reports Q1 (Apr) loss of $0.12 per share, $0.05 better than the S&P Capital IQ Consensus of ($0.17); revenues rose 46.1% year/year to $1.62 bln vs the $1.53 bln S&P Capital IQ Consensus.
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Autoship customer sales were $1.10 billion, 48.0% higher year-over-year, and surpassed $1 billion for the first time in a single quarter.
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Free cash flow was negative $21.8 million in the first quarter compared to negative $63.4 million in first quarter 2019.
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Co issues upside guidance for Q2, sees Q2 revs of $1.62-$1.64 bln vs. $1.55 bln S&P Capital IQ Consensus.
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Co issues upside guidance for FY21, sees FY21 revs of $6.55-$6.65 bln vs. $6.41 bln S&P Capital IQ Consensus.
Our CHWY Research and Conference Call Notes:
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BofA/Merrill raises their CHWY tgt to $60 from $47. Analyst Nat Schindler said, "Chewy 1Q of sales/EBITDA $1.62bn/$3.4mn widely topped Street ests. of $1.53bn/- $13.5mn. 1Q guidance for $1.62-1.64bn in sales topped the Street's $1.55bn. Full year guidance (not given in 4Q) was for breakeven EBITDA margins and $6.55bn-$6.65bn in revenue vs. street's $6.41bn/breakeven.
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Excluding 1Q's $70mn of stockpiling demand, growth was 40%, with the high end of 2Q's guide implying 42% as surging customer acquisition in 1Q flows through to growth. We see '20 guidance as conservative on 2H and think spiking customer adds and CHWY's subscription revenue model support upside."
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Credit Suisse raises their CHWY tgt to $53 from $46. Analyst Erin Wilson Wright commented, "With its shares up 78% YTD (vs. S&P -1%), we acknowledge CHWY's shares have held up well, reflecting the inherent resiliency of pet spending and favorable channel shifts amidst the COVID-19 pandemic. While we are encouraged by the 2020 clarity and implied stickiness of its post-COVID customer cohort, we expect stepped up marketing spend in the balance of the year as well as ongoing heightened logistics costs in 2Q.
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On valuation, its shares currently trade at 2.6x CY21E EV/Sales, still a notable discount to its broader peer group of ecommerce retail, animal health, and healthcare IT services companies (3.7x), not fully reflecting its rapid growth trajectory and longer-term profit opportunity. Risks include competition, consumer spending shifts, advertising spend, ownership structure."
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Other target moves: RBC Capital Mkts raises their CHWY tgt to $61 from $40; UBS raises their CHWY tgt to $49 from $45; Barclays raises their CHWY tgt to $50 from $48; Wedbush raises their CHWY tgt to $55 from $53; Nomura raises their CHWY tgt to $62 from $40.
