Breaking Down Revenue And Profit Trends For D2C Leader In Pet Supply

Key Takeaways

• Chewy turned a profit for the first time in the third quarter of 2022.
• Net sales increased 14.5% year-over-year to $2.53 billion.
• It plans to roll out a pet insurance option and a private-label wellness brand in 2023.

Chewy is a company for pet owners to get the best food and pet-related items at the lowest price. The company has a long-term vision for dominating this industry and spent money upfront building distribution centers to achieve its goals.

While the company experienced steep losses in the early years due to these investments, they are now starting to pay off as Chewy reported its first positive net income. Here is what is happening with the online retailer and if they can continue executing their plan.

Chewy stock in the news

Chewy wants to be the most convenient and trusted destination for pet parents and partners everywhere. After releasing its third quarter results, it appears the company is well on its way to fulfilling this mission.

When the company went public in 2019, it reported a net loss of $252 million. This is expected of a small business in the early stages. The company continued to report a net loss as the years passed, but the losses became smaller each year.

Fast forward to the third quarter of 2022, and Chewy reported its first net income of $2.3 million.

The concerning part of the report is that net sales are slowing. In 2019, net sales increased by 40% compared to the prior year. However, in the third quarter of 2022, sales increased by 14.5% year-over-year.

While this is worrisome, a deeper look into Chewy shows more positive news.

Net sales per active customer increased 13.8% year-over-year, gross margins are 28.4%, and the company has 20.5 million active users, which is 0.6% higher year-over-year.

As with Amazon, Chewy owns its own distribution network. It has 13 fulfillment centers, with two more opening in the next 15 months. The operations at these centers are entirely automated, helping to keep costs low.

By owning its distribution network, Chewy can control costs. This means every new customer it adds increases its profit margin. While its gross profit margin is 28.4%, its net profit margin is only 0.1% at present.

The company’s stock reacted positively to the earnings report. It rallied 10% when the market opened and closed the day up 7%. Year to date, the stock is still down 25%, which is a little more than the S&P 500 Index but not as bad as most major tech companies.

Income Statement review

Net sales for the third quarter came in at $2.5 billion. For the first three quarters, it totaled $7.3 billion. This is an increase of 14.5% compared to the third quarter of 2021 and 13.7% compared to the first three quarters of 2021.

Total operating expenses increased from $616 million for the third quarter of 2021 to $720 million for the current quarter. This is primarily due to inflation increasing the costs of running a business.

Net income rose 107% from a net loss of $32 million in the third quarter of 2021 to a net gain of $2.3 million for the current quarter.

Looking at net income for the first nine months of the year, Chewy earned $43 million in 2022 compared to a loss of $10 million year-over-year, representing an increase of over 500%.

Balance Sheet review

Cash and cash equivalents decreased to $378 million compared to $603 million in the third quarter of 2021. However, total current assets increased year-over-year from $1.3 billion in 2021 to $1.5 billion in 2022.

Current liabilities also increased year-over-year to $1.7 billion from $1.6 billion a year ago.

Additional financial results

There are two other important financial results that Chewy shared that are not listed on the income statement or balance sheet. The first is auto-ship customer sales. These customers agree to a subscription and have products automatically shipped at specific intervals.

These sales increased from $1.5 billion in the third quarter of 2021 to $1.8 billion for the current quarter, which is an 18.8% change.

This shows that Chewy has a loyal customer base. If they continue to attract new customers, they should be able to convert a good amount to auto-ship customers.

Also, free cash flow increased from $2.2 million in the third quarter of 2021 to $69 million in the current quarter. If this continues to grow, Chewy can pay down debt or refinance it if it can get a better interest rate.

They can also use the cash to issue shareholders dividends or reinvest it into the business to increase growth.

Chewy stock moving forward

Next year and beyond will be interesting for Chewy. Now that it has turned a profit, its primary focus needs to be adding additional customers. This will help increase the profit margin since the backend is nearly fully automated.

However, with the threat of a recession in 2023, it could be difficult to gain market share.

This is evident in its latest earnings. For the third quarter of 2022, it saw an increase of 0.6% in active customers compared to the same period in 2021.

The economy is weak now, and the company is struggling to grow its customer base. This is concerning if the economy continues to soften.

Fortunately, Chewy shouldn’t see a significant downturn in sales, even if a recession does hit. This is because the core of Chewy customers buy pet food, a necessity.

Add to the competitive pricing that the site offers, and only some of its customers will be looking to purchase pet food from places like Walmart or dollar stores since the pricing is already low.

Finally, Chewy is expanding its line of pet insurance plans and its private-label Vibeful brand, offering multivitamins and pet supplements. These two categories could be significant sources of income for the company that will help to increase gross margins further.

Bottom Line

Chewy has a bright future and could be worth investing in. If the company can execute its mission to build its customer base, this stock will rally and could eventually become a household name like Amazon.

It will be important to see their next quarterly release to see their active customer data and the impact of the new product lines on Chewy’s bottom line.

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