Supply Chain, Labor Challenges Eat Into Chewy’s Profits

Online pet retailer Chewy blamed price inflation, increased shipping costs, and labor shortages for a third-quarter loss that was twice as great as analysts expected, and executives said those challenges could be tougher in the current quarter and carry over into next year.

Investors, however, may be more worried about fears that Chewy’s best growth years are behind it.

Chewy’s stock dropped by as much as 8% in after-hours trading immediatelyfollowing the quarterly earnings release.

Before the 4 p.m. earnings release and 5 p.m. conference call, Chewy’s stock had closed down 6.32% for the day, at $56.30, and hit its 52-week low of $55.95 during the day. The stock has fallen 53% from its 12-month high of $120.

Chewy reported net sales of $2.21 billion, in line with analyst’s expectations and its own guidance, but had a bigger loss than expected, or 8 cents a share.

Analysts had expected sales of $2.21 billion and a loss of four cents a share.

By most measurements, Chewy is still enjoying robust growth. Its net sales were up 24.1% compared to the third quarter of 2020, and its active customer count was up 15%, year-over-year, at 20.4 million.

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But any growth is compared to higher rates in past quarters, with investors noting those gains were below those of the second quarter, when sales rose close to 27%, and active customers up 21%.

On December 6 Wedbush Securities downgraded the stock to neutral from “outperform” and cut its price target to $70, from $90, saying it expected the pace of new customer acquisitions to weaken.

CEO Sumit Singh, in a conference call after the earnings release, said the third quarter numbers, coming on top of huge spikes in sales and new customers during 2020, in fact prove that Chewy still has lots of growth ahead of it.

“These topline results and our continued growth this year demonstrate the durability of our business model and the overall strength of the pet category,” Singh said.

“Our ability to retain the significant revenue gains we recorded last year during the height of the pandemic and then adding meaningful growth on top this year clearly reflects the soundness of our long-term strategy,” he said.

New customer growth continues to exceed pre-pandemic levels and retention rates remain in line with previoue levels.

More importantly, the spending power of its newer customers continues to improve, Singh said. Chewy estimates that the expected lifetime values of the third-quarter new customer cohort is 12% higher than their pre-pandemic counterpart.

Net sales per active customer increased by a record amount, $56, to hit $419.

“And even with this gains we are still only capturing a fraction of the average U.S. pet spend per household,” Singh said.

“There are plenty of reasons for optimism,” Singh said. “Consumer engagement is high, business momentum is strong and we believe the long term positive trends of more pet ownership, higher per pet spending and increased e-commerce penetration are as strong as ever.”

Chewy is continuing to lean into pet health as a growth driver. It has launched a number of initiatives to partner with veterinarians to fill pet prescriptions through Chewy, and this week it announced a partnership with pet insurance leader Trupanion TRUP to offer exclusive pet insurance and wellness plans to Chewy customers. The partnership will let Chewy leverage Trupanion’s software to pay vets directly. These plans will be available for purchase on Chewy beginning in the spring of 2022.

Singh noted that only about 2 to 3% of U.S. pet owners have pet health insurance currently. “We view this as a huge opportunity.” He expects the insurance sales to be profitable from the start, but he also views it as a way to create greater customer engagement and brand loyalty.

Chewy’s online systems for connecting vets with Chewy customers could easily be expanded into non-health categories, such as grooming, Singh said.

When Chewy went public in 2019, it had to convince skeptics that it could hold its own against Amazon, even though it was growing sales at a rate of more than 40%, and that it could be profitable,

Chewy answered the skeptics by saying look at our topline growth, the bottom line will get there. That is the strategy Chewy continues to follow. Singh and his team believe the short-term supply chain and labor challenges will pass, but the long-term foundation they are building will determine Chewy’s future.

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