Logistics Improvements Boost Chewy’s Profits

Online pet retailer Chewy said its third quarter results, released today after the market closed, show investments it made in fulfillment and logistics are paying off.

Chewy surprised analysts, who had been expecting a loss for the quarter, by posting net income of $2.3 million, and earnings per share of 1 cent. The retailer also beat expectations for revenue, posting net sales of $2.53 billion for the quarter, up 14.5% over the third quarter of 2021.

Chewy is showing that it is able to combine its image as a warm and fuzzy, feel-good company that understands pet lovers, with hard-nosed business decisions that cut costs and give it an edge in the competitive pet space.

But while analysts on the earnings call praised Chewy for its performance during the quarter, investors didn’t immediately reward Chewy for the positive results. Chewy’s stock, which closed up 1.79% at $41.97, was down more than 2% in after hours trading as of 7 p.m.

Chewy CEO Sumit Singh credited the company’s expanded automated fulfillment centers with helping to significantly improve gross margins.

During the third quarter, Singh said, 30% of orders were shipped from the automated fulfillment centers, up from 10% in the prior year.

“Our automated FC [fulfillment center] network is handling an increasingly larger portion of our outbound shipping volume, at progressively lower variable cost per order,” Singh said.

The company also improved its inventory positioning to have goods ready to be shipped closer to the delivery destination, reducing shipping distances, times, and costs.

Additionally, two new import routing facilities are on track to handle 90% of the company’s import volume by the end of 2022, and have helped mitigate freight costs.

Gross margin expanded 200 basis points to 28.4%, a new quarterly high for the company.

“The fact that we are simultaneously driving top line growth and expanding margins is yet another proof point of our ability to get big fast and get fit fast, regardless of the macro environment,” Singh said.

Singh, who became CEO in 2018 and guided Chewy through its 2019 IPO, has made getting fit – or profitable – his mantra since joining the company.

The top line growth during the quarter, Singh said, shows that the demand for pet products, which surged with the dramatic increase in pet ownership during the pandemic, continues to be resilient despite inflation.

“The operating environment remains dynamic and evolving,” he said. “What hasn’t changed is how much pet parents value the enduring companionship of their pets, and it is this emotional bond that sustains the pet category through all phases of the economic cycle.”

But that pet love has to be backed up by “low prices, personalized service, and delivery convenience,” and Chewy’s ability to offer that “continues to resonate with our customers,” Singh said.

“This enables us to build the long-term trust that in our view allows us to outgrow our competitors and take market share,” he said.

Focusing on execution issues like logistics, he said, “allows us to take this growing market share and transform it into incrementally higher profitability and growing free cash flow.” Or in other words, a bigger, fitter, Chewy.