Chewy Earnings: Can Momentum Pick up After Q1 Supply Chain Headwinds?

Amazon recently surged ahead of Walmart and became the largest retailer in the world outside of China. Investors will be keen to see the Q2 results for Chewy (CHWY), Amazon’s strongest competitor in the pet sector. The September 1st Q2 CHWY earnings report and investment analysis will indicate if the online pet retailer can build on the solid upward momentum accelerated by the pet-buying spree during the pandemic last year.

Chewy is coming out of a disappointing Q1 top-line performance due to supply chain headwinds after a strong 2020 propelled by meaningfully tailwinds, namely growth in pet ownership and mass migration to online shopping, which has accelerated during the pandemic. Growth of desktop unique visitor traffic to chewy.com, our key indicator for active customers, continued to decelerate in Q2. Therefore, the question remains whether or not the robust growth in Chewy’s Active Customer base in 2020 can be sustained or if it was a pull-forward driven by pandemic tailwinds.

With the growth rate in unique visits starting to cool off, our data suggest that the growth rate in active customers will likely moderate.

Despite a potential cooling-off in the growth of the active customer segment, our data indicates that Chewy is strengthening its ability to turn web browsers into paying customers. Similarweb converted visits data on chewy.com, a strong directional indicator of “Non-autoship” sales, accelerated versus Q1.

Chewy’s sales are segmented between “Autoship” and “Non-Autoship” sales. “Autoship” sales result from when a customer sets up a regular automatic reorder on a product or multiple products, which results in a stream of recurring revenues each month. By contrast, customers making a one-off purchase are classified as “Non-autoship” sales. Chewy’s management team is highly-focused on turning customers who make one-off purchases with Chewy into Autoship subscribers.

COVID-19 may have been a crisis for much of the U.S. economy and certainly a tragedy for millions of families across the globe. But in tough times, Americans stuck indoors brought home furry companions in record numbers, and Chewy was merely a few mouse clicks away to help.

Chewy’s Q1 net sales increased 32% to $2.14 billion, and total active customers increased by 4.7 million or 31.6% to end the first quarter at 19.8 million. Average annual sales per active customer increased by 8.7% to reach $388.

And that’s just the start.

Chewy’s active customers typically spend more over time. As their active customer base grows, so too will future revenue momentum. Chewy active customers spend over $400 in their second year compared to approximately $700 in their fifth and almost $900 in their ninth year. Current Chewy active customers have been with the retailer for an average of 2 years.

Programs recently put in place to enhance their customer experience and build on Chewy’s active customer base include fresh and prepared pet food and high-value health care services. Chewy pet health and wellness offerings read like a Blue Cross plan and encompass vet dietary advice, OTC medicines, pharmacy, and prescription fulfillment through ‘Petscriptions’ as well as telehealth.

Active customers are key to sustainable growth

In short, Chewy’s active customer growth is an essential indicator of how sustainable long-term growth will be for Chewy, who still ranks second in the online pet supply sector behind Amazon. Some skeptics may argue that the pet buying craze was a once-in-a-generation event due to the pandemic and will likely drop off in the next few quarters. A cooling off in the U.S. pet adoration trend of recent months could significantly scale back expectations for future growth.

According to Chewy’s Chief Financial Officer, Mario Marte, the pet supply retailer expects solid double-digit growth across the board for Q2. Chewy sales are estimated to grow 26% to 28% YoY and hit between $2.15 billion and $2.17 billion for Q2. Full-year 2021 net sales guidance is between $8.9 billion and $9.0 billion, representing 25% to 26% YoY growth.

Despite some concerns about a slowing down in the buying craze, Chewy management certainly has solid grounds for their expectations for continued growth in active customers, especially after elevated out-of-stock levels negatively impacted the company in Q1. However, Similarweb web traffic data for chewy.com suggests active customer growth continues to cool off.

That said, this deceleration is stabilizing, which is a positive long-term signal for Chewy, especially since the company is lapping over tough comparisons from last year. Additionally, converted visits, or share of verified visits ending at the purchase confirmed or ‘thank you’ page on chewy.com, accelerated to 45% YoY versus Q1, meaning the company may have seen an increase in one-off purchases during the quarter. This is a positive sign that Chewy’s long-term strategy of increasing net sales per active customer is working.

Chewy will likely remain a second-place contender behind Amazon in the online pet sector. Nonetheless, Chewy will continue to outperform its rivals in terms of web visits significantly.

Tap into more pre-earnings insights

In this blog, we looked at how Autoship numbers impact Chewy’s digital performance and growth potential ahead of Q2 earnings.

You can receive all our latest earnings previews and stock insights by joining our Investor Newsflash.