The Reason Chewy Has An Edge

Chewy is off to a positive start in 2023 and the online pet products retailer can thank its Autoship customers for that.

The retailer posted a 14.7 percent year-over-year increase in its first-quarter net sales, improved its gross margin by 90 basis points to 28.4 percent and reported earning per share at five cents, not the loss of four cents expected by analysts.

CFO
CFO
Mario Marte said that sales to autoship customers were up 18.6 percent in the first quarter.

“Autoship customer sales have grown to represent 74.7 percent of total net sales. Our primary measure of customer engagement, NSPAC (net sales per active customer), grew 14.8 percent year-over-year to $512, driven primarily by our large customer base that spends more with us over time, growing Autoship customer sales and increasing levels of cross-category purchases by our customers. Both NSPAC and Autoship customer sales reached new record highs for the company,” Mr. Marte told analysts on Chewy’s earnings call.

“Autoship is a big factor in Chewy’s success, however it’s their outreach to shoppers prior to the auto-ship order being processed that seals the deal for most customers,” wrote Deann Campbell, chief strategy officer at Hoobil8, in an online discussion about Chewy’s earnings on RetailWire last week. “Giving shoppers a heads up prior to billing and making it easy to adjust order timing is what really instills to trust and creates loyal customers, one of which is me! Without this piece, autoship often does more harm than good as shoppers resent being billed automatically, and resent having to track refill timing by themselves.”

Other members of RetailWire’s BrainTrust of industry insiders likewise saw autoship as one well-executed element in Chewy’s overall solid strategy.

“Chewy is a very good business that treats customers well, that’s part of their success,” wrote Neil Saunders, managing director at GlobalData. “However, they also operate in a segment where buying is essential and habitual which makes auto-shipping a useful option. One of the good features of Chewy is that the customer is always informed and remains in control over orders. There are no surprise shipments or charges.”

“it’s clear that autoship (with its high penetration of total sales) is driving the sales right now, but I would also credit Chewy’s very clever and appealing marketing campaign. (Favorite child, anyone?)” wrote Dick Seesel, president of Retailing in Focus.

Chewy said the quarter ended with a “modest” increase in active customers compared to the fourth quarter of 2022. The retailer said it had 20.4 million active customers in the first quarter.

The company’s gross margin was “buoyed by lower-than-anticipated promotional activity, overall strength in average order size, and better-than-expected leverage in freight and packaging,” according to Mr. Marte.

Chewy increased its guidance for the fiscal year as it opened a new automated fulfillment center in Nashville (its fourth overall) and prepares to expand into Canada.

“We’re not starting at ground zero in Canada, even though we’re not present in Canada. Our market awareness broadly sits in the mid-twenties. And even though that’s lower than obviously what we enjoy here in the United States, it’s worth noting that it’s not zero,” said Sumit Singh, Chewy CEO.

Mr. Singh believes that Chewy’s focus on service will be as welcomed by Canadians as it is by Americans. He said the pet products market is expected to grow slightly faster in Canada than in the U.S. over the next five years and that online sales penetration is slightly below the American market. Both of these point to opportunities for Chewy, he said.

The BrainTrust also had some thoughts on Chewy’s impending northward move and its chances for success.

“If Canadian customers are as devoted to their pets as we are in the states and if they value great customer service, great product quality and variety, and ‘order from the couch’ convenience, then Chewy should fare better than other retailers,” wrote John Lietsch, chief operating officer at Bloo Kanoo. “The assumption is that Chewy will be able to leverage its operational expertise and experience to continue to deliver the level of service and product quality that has endeared it to its U.S. customers and to do it at a competitive price.”

“Auto shipping based on a pet’s eating habits is a big convenience factor, and is part of the loyalty calculation. It is a service, one that makes feeding your pet that much easier,” wrote Mark Self, CEO of Vector Textiles. “They will experience the same if not higher level of success in Canada, count on it!”

Some noted that Chewy might even have some advantages in a market notoriously difficult to crack for American retailers.

“As a pure e-commerce retailer they will not have the brick-and-mortar challenges north of the border that so many other American retailers have faced,” wrote Mr. Seesel.

“As to Canada, by its geographic dispersal of population, it is easier – and less expensive – to reach more consumers via e-commerce than with sparsely located stores,” wrote Bob Amster, principal at Retail Technology Group.