by Ian Harvey
December 22, 2020
Chewy stock has more than quadrupled since going public at $22 early last year. Revenue growth is accelerating in the COVID-19 calamity. Analysts are starting to increase their price targets.
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Chewy stock continues to rise as the pandemic continues. Chewy has built a durable and scalable model that should benefit from secular trends towards digital, wallet share gains, and total addressable market expansion.
There are several factors driving revenue growth, which includes an expanding base of users, greater retention of its existing base, and greater overall basket size at the checkout counter.
As well, Wall Street analysts deemed the online provider of pet food and products well positioned to gain market share in 2021 and increase net sales per customer.
A Closer Look at Chewy…..
Dania Beach-based Chewy Inc (NYSE: CHWY), a pure play e-commerce business in the United States providing pet food, pet products, pet medications, and other pet health products, roared to a record high Thursday as two Wall Street analysts deemed the online provider of pet food and products well positioned to gain market share in 2021 and increase net sales per customer.
And, look for more forward movement to come!
Pet ownership is up dramatically this year: A recent LendingTree survey found that 8% of respondents who owned a pet got it between March and September. Chewy -- an online pet-food and supplies provider -- is benefiting from the surge. Adding fuel to the fire, general spending on pets is also up. Being stuck at home, it turns out, is a great time to add a furry companion to the family and pamper them once they arrive.
Chewy stock climbed 6.4%, closing at 100.18 on the stock market today, hitting a record high. It's hit new highs for three straight days and is up 20% this week. In addition, its relative strength line is at a record high, a positive indicator.
While consumables are the lion's share of Chewy revenue — comprising about 70% of 2020 sales — the company is making inroads with new initiatives such as health care services for pets. In late October, Chewy announced plans to expand a telehealth service that provides continuous veterinarian care. This includes an expansion into pharmacy, gift cards and personalized products.
Chewy, Inc, together with its subsidiaries, engages in the pure play e-commerce business in the United States.
The company provides pet food, pet products, pet medications, and other pet health products for dogs, cats, fish, birds, small pets, horses, and reptiles through its chewy.com retail Website, as well as its mobile applications.
The company held its initial public offering in June 2019, pricing shares at 22 and raising $1.02 billion. Chewy was a spinoff of PetSmart (PETM). Chewy says it's the largest U.S. online retailer of pet food and supplies.
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Earnings for Chewy Stock…..
Revenue in the fiscal third quarter jumped by 45% to reach $1.78 billion, which topped both Chewy's guidance ($1.7 billion to $1.72 billion) and the consensus estimate ($1.73 billion). That translated into a net loss per share of $0.08, which was better than the $0.13 per share that analysts were expecting the company to lose.
Chewy added 1.2 million active customers during the quarter, and net sales per active customer ticked up on a sequential basis to $363. The company continues to steadily add customers while getting those buyers to open up their wallets even more. The core Autoship program generated over $1.2 billion in sales, representing 69% of total revenue. That proportion is staying very consistent, providing Chewy with recurring revenue and meaningful visibility into the sales pipeline.
Gross margin was flat on a sequential basis, which CEO Sumit Singh attributed to less aggressive promotional activity than expected. However, promotions did start to ramp up near the end of the quarter as the holiday shopping season came into view. Many other operating metrics improved heading into the final stretch of 2020.
"Volume in the back half of the quarter outperformed expectations as traffic, conversion, orders, and customer retention all strengthened from September into October as customers shifted their shopping behavior this year to shopping earlier, responding favorably to our expanded assortment and innovative product and service launches such as personalization and gifting," the company said in its letter to shareholders.
Chewy stock is making progress on several other strategic initiatives. The pharmacy business is growing well and is expected to bring in $500 million of gross revenue this year, which the company believes makes it the largest e-commerce pet pharmacy in the U.S. On a net basis, pharmacy sales are expected to be $350 million, which should represent around 5% of total sales for the year. The pharmacy segment has now achieved enough scale to start contributing to gross profits.
Operating cash flow skyrocketed to $63.4 million, up from just $1.6 million a year ago. That money is allowing Chewy to invest aggressively in the business, particularly its fulfillment network. After spending $30.5 million in capital expenditures, Chewy generated $32.9 million in free cash flow.
Moving Forward for Chewy Stock.....
Guidance for the fiscal fourth quarter was also strong, with revenue forecast in the range of $1.94 billion to $1.96 billion. That outlook is ahead of the consensus estimate of $1.79 billion. That should bring full-year revenue to $7.04 billion to $7.06 billion, representing 45% growth from 2019 at the midpoint.
It was a strong quarter that reinforced Chewy's growth trajectory. The company's business has benefited from shifting purchasing patterns caused by the pandemic. Even after vaccines become available and the crisis subsides in the months ahead, Chewy expects to keep posting impressive results thanks to the sticky nature of Autoship -- overall customer retention has increased by 6 full percentage points year to date. Singh believes that data point helps "address the question that we've all been wondering about through the onset of this year as to are we going to be able to retain the cohort of customers that we are acquiring during the pandemic."
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Needham analyst Rick Patel named Chewy his top pick for 2021 and raised his price target to $110 from $90, with a buy rating.
"Chewy stock has built a durable and scalable model that should benefit from secular trends towards digital, wallet share gains, and total addressable market expansion," Patel wrote in a note to clients.
Moreover, he sees the online penetration for the pet category as low compared with other product categories. Online penetration for the pet category is estimated at 27% and is poised to reach 34% market in 2021.
Also, RBC Capital Markets analyst Mark Mahaney on Wednesday raised his price target on Chewy stock to $113, from $85, with a rating of outperform.
Executives at Chewy point to several engines driving revenue growth this year, Mahaney said in a note to clients. This includes an expanding base of users, greater retention of its existing base, and greater overall basket size at the checkout counter.
Chewy stock is up 240% this year, and still climbing!
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