Chewy Stock May Be Overfed - The Wall Street Journal

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Chewy had its initial public offering on the New York Stock Exchange in June of last year.

Photo: Michael Nagle/Bloomberg News

By Jinjoo Lee

June 10, 2020 6:00 am ET

Chewy was in for a treat last quarter as furry companions joined the list of items humans acquired while sheltering in place during the coronavirus pandemic. Investors seem to have overfed on the shares, though.

The online pet-products retailer saw sales soar by 46% in the quarter ended May 3, exceeding even the higher end of analyst estimates by more than 6%. Even more impressive was its swift turn to profitability: adjusted earnings before interest, taxes, depreciation and amortization swung to $3.4 million from its previous negative levels. Analysts hadn’t expected the figure to turn positive until 2021. In its new guidance, the company said it expects to break even for the full fiscal year, which ends in February 2021.

Shares were briefly up in after-hours trading Tuesday, but soon fell below that day’s closing price. High growth expectations were probably already baked in: Chewy’s stock was already up more than 77% this year. The company also gave somewhat tepid sales guidance for the present quarter, implying flat sales to just 1.2% growth sequentially.

The positive Ebitda number was partly driven by what executives on a conference call called “marketing efficiencies.” The company said it was able to spend less, partly because it saw a lot of organic traffic to its website. However, it expects these costs to increase over the rest of the year as it plans to ramp up marketing.

A lot of the gains were specific to the peak pandemic months. Pet foster and adoption numbers were 60% higher in March and April compared with the previous years, Chewy’s chief executive said during the earnings call late Tuesday. The company clearly benefited from that growth: of the 2.5 million customers that signed up for pet profiles last quarter, one in every four was for a new pet. By May, however, the pace of pet adoption had reverted back to pre-pandemic levels.

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Chewy’s ability to retain customers—through customer service and expertise—was the factor that allowed it to get its very early venture capital funding. That strength should help maintain growth going forward. Best Buy’s hold on the electronics market despite competition from Amazon speaks to the strength that specialty retailers can have with the right customer service.

And there’s definitely room for new customers: A survey conducted by Jefferies found that roughly 45% of respondents expected to make more pet purchases online when the pandemic ends. Among those, just 18% said the purchase would be from Chewy, while 23% and 14% responded with Amazon and Walmart, respectively.

There are many reasons to be excited about Chewy, but the shares are no longer a bargain. Its shares are now trading at 3.2 times trailing sales, above Amazon’s five-year average of 3.1. Chewy has some more hoops to jump through before it earns a better rating than the e-commerce giant.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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