Isn't Chewy Supposed To Be a Stay-at-Home Economy Winner?

Investors have been rewarding companies in a down stock market if they can withstand the new stay-at-home economic impact. On the flip side, investors have been punishing the companies which are falling behind in this new economy that is falling rapidly into a recession. Many of the would-be winner companies are those which have online only or operate mostly without traditional brick-and-mortar locations.

Chewy, Inc. (NYSE: CHWY) is supposed to be one of the new economy winners due to its model of sending all of those thousands of pet products and pet food directly to pet owners. Unfortunately, a large portion of America just became unemployed and that means that Fido and Fifi may have to live with only the essential and mandatory items. 

For retrospect from the Great Recession, the loss of homes and the loss of jobs was a brutal period for pets. Millions of newly unemployed pet owners may make for hard times as Chewy moves on the path to profitability.

According to the company’s fourth quarter ending February 2, 2020, Chewy’s net sales rose 35% year-over-year to $1.35 billion. The Chewy earnings report also showed a 320 basis point in gross margin to 24.1%. Its adjusted EBITDA loss of $5.8 million was an 89% improvement from a year earlier, while its net loss that included $45.9 million from stock-based compensation came to $60.9 million. Chewy’s adjusted EBITDA margin rose by 470 basis points, but that was still -0.4%. The adjusted earnings report came to -$0.15 per share rather than -$0.17 that had been expected by Capital IQ.

As for guidance, Chewy now sees revenues landing between $1.50 billion and $1.52 billion for the current quarter ending on May 13. Capital IQ was calling for revenues of $1.45 billion.

Chewy is the leader as an online destination to purchase pet products, as well as supplies and prescriptions. It is partnered with over 2,000 brands targeting the pet industry. Chewy’s still has to prove whether or not it is a recession proof stock, and the company is nowhere close to being able to support a dividend at the current time. It has already been shown as a stock winner in hard times despite the drop in the S&P 500 and other major indexes.

A big question ahead, particularly with Chewy still not being profitable, is how Chewy will really hold up through the recession as customers have to pinch every penny and dollar they can save. What happens to Chewy’s customer base after 3.3 million jobless claims for the week of March 20 was followed by nearly 6.5 million jobless claims in the week ending March 27? Those nearly 10 million jobs, plus the job losses and business closures coming in the weeks ahead, are bound to include many pet owners.

The good news about Chewy so far is that the after-hours punishment is not that great. The bad news is that its shares had been holding up better than the market in general, and that means that the investing community may demand more. Chewy’s closed down 2.56% at $35.06 on Thursday and the after-hours trading session had its shares down 3% at $34.00. Its post-IPO high has been $41.34 and this was close to a $22 stock less than a month ago.

The research team at BofA Securities had already noted that pet retailer spending surged in March. The firm updated its earnings and revenues using aggregated client data on credit card and debit card spending. The firm noted a surge in March’s growth rates is likely due to customers’ stockpiling, although the firm also sees Chewy’s as a long-term winner here as customer habits change and will benefit its ecommerce model.

Other analysts on Wall Street have been somewhat quiet on Chewy despite its recent gains ahead of earnings. On March 18, JPMorgan maintained its Overweight rating but trimmed its target down to $38 from $42. 

As for the analyst group as a whole, Refinitiv’s consensus estimates still have Chewy losing money for 2020 and 2021. Those estimates are -$0.65 EPS this year and -$0.49 EPS next year.

Sumit Singh, Chief Executive Officer of Chewy, said of the report:

We completed 2019 with strong fourth quarter results, delivering net sales growth of 35 percent and expanding our gross margins by 320 basis points. While 2019 closed on a high note, and 2020 got off to a strong start, the world changed dramatically with the coronavirus outbreak. In times like these, we know how special and comforting the bond is between humans and pets, and we devote ourselves every day to supporting those special relationships. We are here, 24/7, caring for the safety and well-being of our team members and meeting the increased shop-at-home needs of our customers, staying true to our mission of being the most trusted and convenient online destination for pet parents everywhere.