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Pet care online retailer Chewy (NYSE:CHWY) has grown in leaps and bounds over the past several years. Near term macro challenges are expected to weigh on performance this year, but longer term the company is working on several strategic initiatives to increase wallet share, boost revenues and margins. Competition however is extremely stiff which could dampen future growth. Some may view the stock as a hold while others may view the stock as a sell (given the high short interest).

Solid results in a year of tough comps, supply chain challenges

Like most other ecommerce players, pet-supplies ecommerce company Chewy was a beneficiary of a pandemic-driven online retail and pet adoption boom over the past two years with revenue growth accelerating during FY 2020 (financial year ended January 2021) to 47% YoY to USD 7.15 billion. Revenue growth decelerated in FY 2021 (year ended January 2022), however driven by active customers increasing 8% YoY to 20.7 million in FY 2021, and net sales per active customer (NSPAC) rising 16% YoY to a record USD 430, Chewy still notched a robust double digit growth rate of 24% YoY to USD 8.89 billion, a strong performance in a year of supply chain challenges and tough comps (most players in the online retail space reported decelerating revenue growth in FY 2021 due to tough comps, receding pandemic-related tailwinds, and supply chain headwinds among other reasons; Amazon’s (AMZN) FY 2021 revenue growth decelerated to 21.7%, Etsy’s (ETSY) FY 2021 revenue growth slowed to 35% YoY, Shopify’s (SHOP) FY 2021 revenue growth slowed to 57% YoY, eBay’s (EBAY) revenue growth slowed mildly to 17% YoY). Chewy’s FY 2021 revenues are 83% higher than FY 2019, representing a CAGR of more than 35%.

FY 2021 gross profits increased 30.5% YoY to USD 2.4 billion. Operating losses narrowed to USD 72.2 million and net losses dropped to USD 73.8 million.

Near-term headwinds: labor crunch, rising freight costs

Chewy has so far navigated near term challenges solidly; revenues have grown despite supply chain bottlenecks exerting pressure on out of stock levels and therefore sales, gross margins have expanded despite rising outbound freight costs pressuring margins (the company’s gross margins expanded to 26.7% for FY 2021, a new company high) and operating losses have narrowed to ( from (1.27%) in FY 2020 to (0.81%) in FY 2021) despite rising wage and recruitment costs contributing to upward pressure on full-year operating expenses.

Going forward near term challenges are expected to continue with management expecting a 100-150 basis point impact on gross margins due to rising outbound freight costs (their new outbound shipping contract with FedEx went into effect in January this year the impact of which is expected to show up in 2022). To mitigate the impact on margins, management has launched supply chain and logistics initiatives to lower freight costs (such as opening multiple automated fulfillment centers, four are planned for 2022), and accordingly expects FY 2022 margins to be broadly similar to FY 2021.

Market growth and long-term strategies may contribute to top-line growth and margin expansion

Pet ownership increased during the pandemic, and a growing pet population along with pet humanization is driving the overall pet care industry which is expected to see robust growth in the coming years. A number of players have moved into the pet care space; food giants Nestle (OTCPK:NSRGY) and General Mills (GIS) have moved into pet food with stellar results, and while retailers including Amazon, Target (TGT), and Walmart (…….


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