Markets

Chewy Needs to Prove It's No Dog in Q2

Online pet supplies retailer Chewy (NYSE: CHWY) has had a rough go of it since its June IPO. The business was spun off by PetSmart, which is still the majority owner of the company by a wide margin. The stock was offered at $22 per share, opened on the Nasdaq exchange at $36, and climbed to over $41 in its first day of trading. But it has since seen its fortunes decline and currently trades at around $30 a stub.

As investors worry about Chewy's slowing rate of growth, rising competition from Amazon.com (NASDAQ: AMZN), and significant debt levels, the digital pet shop needs to prove with its second-quarter earnings report (due on Tuesday, Sept. 17) that it's got as much bite as bark.

Smiling dog being petted.

Online pet supplies retailer Chewy needs to show it can be the leader of the pack in its next quarterly update. Image source: Getty Images.

Running with the big dogs

Chewy sits in an enviable market as owners continue to humanize their pets and spend inordinate sums of money on them. The American Pet Products Association says pet owners will spend more than $75 billion on their "fur babies" in 2019, mostly on food and vet care but also on supplies.

According to the market researchers at 1010data, Chewy and Amazon own the online pet food market, each representing a 45% share of the total. Chewy's SEC filings show that online sales of pet food and supplies claimed 14% of the total market in 2017, or $6 billion, up from just 4% two years prior. However, such sales are expected to grow 17% annually through 2022, suggesting there is plenty of upside for both.

Online pet supplies sales, as a separate category from pet food, is also the fastest-growing segment, with 44% growth in 2018 (pet food was third at 42%, behind hair conditioner). So again, there's plenty of room for growth throughout the space.

Indeed, where Amazon's e-commerce market share in the consumer products category fell from 43% to 39% over the past two years, Chewy saw a healthy two percentage point bump to 5%, and Chewy's first-quarter earnings report also indicated it was still rapidly expanding.

Slowing growth may delay profitability

Total revenue across all product lines grew 45% to $1.11 billion earlier this year, and Chewy guided toward second-quarter sales growth of 39% to 42% year over year, or as much as $1.14 billion. For the full year, sales were forecast to increase 36% to 38% on a calendar-adjusted basis to a high range of $4.75 billion.

Yet that also has investors worried. While no company can maintain torrid growth rates, the market may be concerned Chewy's growth is being throttled back sooner than expected, and it's coming as Amazon weighs in for more competitive positioning. Although adjusted EBITDA dramatically improved in the first quarter, narrowing from negative $51.5 million in the prior-year period to just $15.8 million, slowing top-line growth may impact the company's ability to achieve profitability.

A bubble in the making?

Billionaire hedge fund investor David Einhorn of Greenlight Capital has likened Chewy to the dot-com era's Pets.com debacle. In a letter to his investors, he wrote: "For those that think the 2000 bubble was the big kahuna, consider Chewy, which went public in June 2019. Over its life, Pets.com chewed through just over $200 million of investor capital, CHWY has burned $1.6 billion and counting."

Chewy founder and ex-CEO Ryan Cohen says it's an unfair comparison. He told Yahoo! Finance: "Chewy is doing $3.5 billion in sales, and it's burning through roughly $140 million in free cash flow. So comparing a $6 million company with a $3.5 billion company with really strong underlying profitability is really not a strong comparison."

Still, the markets remain uncertain, and there is a lot of competition out there, not only online but from mass merchandisers like Walmart and Target in the physical space. Chewy already has a lot to prove as it approaches only its second quarterly report as a publicly-traded company.

10 stocks we like better than Chewy
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Chewy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of June 1, 2019

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

CHWY AMZN WMT TGT

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More