How Chewy Is Winning The Tug Of War For Pet Dollars

Chewy CEO Sumit Singh began his discussion of the online retailer’s first quarter results by saying the company has been engaged in a tug-of-war between strong consumer demand for pet goods, and an operating environment filled with challenges like inflation, shortages, and supply chain costs.

But the more critical tug-of-war Chewy needs to win is the fight to hold on to its customers, and to fight off the competitors who want to steal them.

Singh outlined yesterday how Chewy is winning that fight, and how it plans to keep winning it. And this time it looks like his words, and Chewy’s Q1 numbers, won over Wall Street.

Chewy shares surged by more than 25% today, following its earning call after the market closed on Wednesday. The stock closed today at $29.18, up 24.2% for the day.

Singh and other Chewy execs, in the quarterly earnings calls, tend to outline their growth strategies in greater detail than many public company leaders. That may be because Wall Street, since Chewy’s first days as a public company, has often reacted skeptically to Chewy’s claim that it was building a lasting growth engine.

Chewy’s strategy, from the beginning, has been one of winning over customers with online convenience and 24/7 customer service staffed by passionate pet owners, and to make repeat purchases easy with its Autoship feature.

Chewy now has multiple years worth of data to show that its customers not only are staying loyal to Chewy, but that they also spend more, the more years they have shopped with Chewy.

Customers, Singh said in the earnings call, typically spend less than $200 their first year, over $400 their second year, approximately $700 by their fifth year, with the longest-standing customers spending nearly $1,000 per year.

That spending curve, Singh said, illustrates “how much future revenue growth is already embedded in our active customer base – revenue potential which we can and will unlock over time.”

Chewy already is unlocking pretty impressive growth, according to yesterday’s earnings report. Net sales increased 14% during the first quarter to $2.4 billion, beating expectations. Autoship sales made up 72.2% of net sales, a record high for the company.

Net income of $18.5 million, although about half of what it was in the prior year’s first quarter, still was an upside surprise to analysts who had expected a net loss.

Those who still are skeptical about Chewy’s long-tern prospects are mainly focused on the question of whether it can keep all of the millions of customers it gained during the pandemic surge in pet adoptions.

Chewy’s active customer base was up 4.2% year-over-year in the first quarter, at 20.6 million, but flat compared to the fourth quarter of fiscal year 2021.

While some analysts on the call asked if Chewy has maxxed out on new customer acquisition, Singh and Chief Financial Officer Mario Marte outlined how the growth in average spend per customer outweighs any decline in the addition of new customers, or even attrition of customers.

The company retained 99.7% of active customers in the first quarter, Marte said, and active customers “tend to stay with us over long periods of time and increase their spend with us year after year,” Singh said.

The company, Singh said, is focusing its customer relations efforts and engagements on those high value customers who have shown they are likely to keep increasing their spending.

“In our model,” Singh said, “the ability to grow share of customer wallet over time is as important as adding customers is, if not more so, to the revenue flywheel that drives long-term growth.”

Chewy’s founding premise was that if you show customers that you love them, and love their pets, they will be loyal to you forever.

It remains to be seen if Chewy’s customers will remain loyal in the face of more inflation or an economic downturn, but for now, at least, Chewy is winning.