Chewy box

Despite being a challenging and unpredictable year, Chewy made significant strategic and operational progress in its fourth quarter. So much so, in fact, that Sumit Singh, CEO of the Dania Beach, Fla.-based online retailer, said that 2020 will go down as a landmark year in Chewy’s history.

That said, Mario Marte, chief financial officer, said the retailer is likely to have to tackle several challenges that may lie ahead—at least, in the short term.

“There are certain headwinds that we continue to navigate through the first quarter,” Marte said. “We expect some of these to be temporary in nature, while others are likely to remain active hotspots for us to manage throughout the year.”

Marte gave the example of the industry-wide disruption in the availability and supply of wet canned food.

“[This disruption] is driving elevated out of stock levels and suboptimal inventory positioning across our network,” Marte said. “Thus far, this has not had a material impact on our business, but it is an area where we intend to remain vigilant.”

In the meantime, the company is enjoying the fruits of this past year’s success.

“As we gathered for this call a year ago, we were just beginning to realize the scope of the COVID pandemic,” Singh said in the earnings conference call on March 30. “Looking back, I’m incredibly proud of the way Chewtopians came together to execute through this incredibly challenging year. … In the face of surge in volume, we kept our supply chains operating and our fulfillment centers, or FCs, open. Our corporate staff and customer service teams quickly adapted to working from home, and our tech and product teams solved challenge after challenge to seamlessly foster that transition. Despite the disruptions caused by COVID and in some cases, because of them, we accelerated the rollout of several strategic initiatives, including the launch of eGift cards and personalized products, the introduction of service innovations like our telehealth offering, Connect with a Vet and compounding services, and the opening of our first automated and first high-velocity fulfillment centers. These accelerated rollouts speak to the adaptability and the innovative spirit of our entire Chewy team.”

Chewy reported net sales of $2.04 billion for the quarter ended Jan. 31, up 51 percent from the year-ago period. Exceeding $2 billion of quarterly net sales is a milestone for the company, Singh said.

“It took us 7.5 years to reach our first $1 billion quarter and only 2 years to reach the $2 billion quarterly sales mark,” Singh added.

Q4 also marked the company’s first quarter of positive net income, according to Marte. Net income was $21 million, and net margin was 1 percent, a 550 basis points improvement year-over-year, Marte added.

Active customer growth and continued strength in purchasing behavior were key drivers of Q4 and full year 2020 momentum, according to Singh. Customer re-activations increased by 40 percent and customer retention improved by 240 base points. As a result, Chewy added 1.4 million net active customers in the fourth quarter and ended the year with 19.2 million active customers, according to Singh.

“As we have shared with you in the past, efficiently adding new customers to our platform, and then growing their share of wallet is a key part of our growth strategy,” Singh said. “For the full year, we added 5.7 million net active customers, reflecting a 42.7 percent annual growth. The customer cohorts we acquired in 2020 were highly engaged and displayed similar and in some cases, stronger purchase and repurchase behavior compared to legacy cohorts. These positive behaviors were driven by a wider product assortment and by a growing set of customer offerings, such as gift cards, personalized products, compounding services and Connect with a Vet.”

Chewy also reported that its core consumables business remains strong and that it continues to gain traction in hardgoods, health care and proprietary brands.

“Looking at the Q4 trends within our key verticals, third-party hardgoods sales grew 40 percent faster than the business overall,” Singh said. “And proprietary brand hardgoods sales more than doubled year-over-year.

“Further within hardgoods, our proprietary brand penetration increased 570 basis points year-over-year to reach 21 percent, continuing the share gains we have reported throughout the year,” Singh added.

Singh also outlined the scale of the “large and growing opportunity” that lays in front of them, and ways in which they intend to meet the challenge of realizing it. Singh broke it down into three trends:

• Increase in the number of pet-owning households in 2020. “Looking at our own data, it is clear to us that these new pet parents are joining us early in their journey,” Singh said. “For example, in 2020, we observed a 35 percent year-over-year increase in the creation of pet profiles for puppies and kitten, and a 40 percent increase in the creation of profiles for newly adopted pets. We get excited about these insights because that newly adopted Chewy puppy is going to grow up, eat more food and shred more toys, leading to a long-lasting relationship with us, resulting in a stream of recurring revenues for years to come. Understanding our customers and anticipating their wants and needs help us create sustainable advantages to win in the pet space.”

• Size of the U.S. pet market. “Today, we compete in roughly 70 percent of the $100 billion U.S. pet market, and we do so primarily in the areas of food supplies and prescription drugs and diet,” Singh said. “That leaves us with an additional $30 billion opportunity in health care and services to grow into, and we are confident in our vision and our ability to do so. Equally exciting to note is that we are continuing to increase our penetration into a growing U.S. pet market that is expected to reach $120 billion by 2024.”

• E-commerce penetration within the U.S. pet market. “Online penetration rates in the retail food and supplies category are estimated to have grown from 7 percent in 2015 to 30 percent in 2020, and are expected to reach 53 percent by 2025, which is in line with the current online penetration rate of categories like books and electronics,” Singh said. “Further, as we are observing, health care and services have already begun to shift online, and we believe this trend will continue and accelerate. Equally importantly, we believe these shift in favor of e-commerce channels are durable and largely permanent. This is where we believe Chewy has won and will continue to win for years to come.”

Year-to-date, the company reported net sales of $7.15 billion, up 47 percent compared to the year-ago period. On a full year basis, Chewy’s net loss improved $92.5 million from $252.4 million in the prior year, and the net margin improved 390 basis points to negative 1.3 percent, Marte said.

Moving forward, Singh said the company will focus on expanding its customer base; continue leveraging SG&A; and invest about $60 million in higher wages and benefits, the bulk of which will be directed to its fulfillment and customer service team.

“At the same time, we expect to see productivity gains accelerate in 2021 from the technology and automation investments we have made in our fulfillment center network,” Singh said. “You may recall that in October 2020, we opened our first fully automated FC. A month earlier than that, we began realizing a different style of efficiency when we opened our first limited catalog, high velocity FC. Given their launch timing, these FCs provided only modest ramp benefit to us in fiscal 2020. In 2021, we expect to realize accelerated productivity gains from their full year operations.”

Singh said that they also expect to open its second automated fulfillment center in Q2 2021 in Kansas City, and another limited catalog facility in Q3 2021. In 2022, Chewy will begin automation retrofits at select fulfillment centers, Singh added.

Guidance for upcoming first quarter net sales is between $2.11 billion and $2.13 billion, and full year 2021 net sales of between $8.85 billion and $8.95 billion.

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