Chewy Beats Earnings Expectations, Raises Guidance Amid Strong Margins and Stabilizing Market Conditions
Chewy (CHWY), the leading online retailer of pet products, delivered a strong performance in its second quarter of fiscal year 2024, beating expectations on the bottom line and raising its full-year guidance. The company’s ability to grow its active customer base for the first time in over a year, coupled with robust margins and a conservative yet optimistic outlook, marks a potential turning point for the e-commerce giant in a challenging market environment.
Solid Q2 Performance: A Mix of Growth and Stability
In Q2 FY24, Chewy reported revenue of $2.86 billion, marking a 2.6% year-over-year increase. This figure aligned with the high end of the company’s guided range of $2.84-$2.86 billion and met consensus expectations. However, the standout performance came from Chewy’s bottom line, where it sharply beat expectations with an adjusted EBITDA of $145 million, or 5.1% of sales, far surpassing the consensus estimate of $111 million (3.9%).
One of the most significant developments in this quarter was the growth in Chewy’s active customer base. The company reported 20 million active customers, slightly above the consensus forecast of 19.97 million and better than Chewy’s internal estimate of 19.93 million. This marks the first time in over a year that Chewy has grown its active customer count, a key performance indicator (KPI) that had previously been under pressure. The increase was driven by stronger-than-expected new customer acquisitions and an accelerated pace of customer reactivation, fueled by Chewy’s enhanced Customer Relationship Management (CRM) strategies and targeted marketing initiatives.
Net sales per active customer (NSPAC) came in at $565, slightly below the consensus of $567 but still representing a record high for the company. Despite the ongoing disinflation in pet food prices, Chewy managed to increase spending per customer, thanks to its successful wallet share initiatives, which encouraged customers to spend more across a broader range of products.
Chewy’s gross margins also outperformed expectations, reaching 29.5%, up 120 basis points year-over-year and above the consensus estimate of 28.9%. This margin strength was largely driven by the company’s high-margin sponsored ads program and a higher mix of healthcare product sales. Additionally, Chewy demonstrated impressive cost control, with Selling, General & Administrative (SG&A) expenses accounting for 18.8% of sales, better than the consensus estimate of 19.2%. This efficiency was supported by disciplined corporate payroll management and gains from the company’s automated distribution centers.
Raised FY24 Guidance: Conservative Yet Encouraging
Following its strong Q2 results, Chewy raised its full-year FY24 guidance, reflecting continued confidence in its business model. The company now expects full-year revenue in the range of $11.6-$11.8 billion, maintaining its previous outlook but implying slightly lower sales growth in the second half of FY24 compared to consensus expectations. However, the company also raised its adjusted EBITDA margin guidance to 4.5-4.7%, up from the prior range of 4.1-4.3%, indicating stronger profitability in the face of softer sales growth.
For Q3 FY24, Chewy guided revenue between $2.84 billion and $2.86 billion, representing a year-over-year growth of 3.4% to 4.2%. While this guidance is slightly below the consensus midpoint of $2.86 billion, it reflects Chewy’s conservative approach, particularly in light of the ongoing economic uncertainty and fluctuating consumer demand.
Chewy’s ability to maintain flat year-over-year active customer numbers by the end of FY24, despite exceeding expectations in the first half, further underscores the company’s cautious outlook. The company is aware of the challenges posed by the elevated retention headwinds from its first half of FY23 cohorts, which had a higher mix of discount-driven customers, potentially pressuring churn rates.
Market Trends and Competitive Landscape
Chewy’s Q2 performance and guidance offer positive read-throughs for the broader pet industry. The company continues to gain market share and expand its margins despite operating in a soft industry environment. Chewy reported encouraging trends in pet household formation, with net adoptions up in the low teens year-over-year and relinquishments down in the low to mid-single digits. These trends, coupled with the stabilization of discretionary demand and promotional activity, are encouraging signs for the pet retail market.
The company’s growth in sponsored ads and high-margin pharmacy product sales are expected to continue driving margin expansion into the second half of FY24. Sponsored ads contributed materially to Q2 and Q1 margin strength, and the program is on track to reach approximately 1% of sales in FY24. Additionally, Chewy’s improved fulfillment network, which contributed about 20 basis points to SG&A leverage in Q2, is poised to deliver further benefits as volumes potentially accelerate in the second half.
Outlook for FY24 and Beyond
Looking ahead, Chewy’s FY24 outlook appears conservative but achievable, with potential upside if industry demand remains stable or improves. The company’s strategic initiatives, including the growth of its sponsored ads program, cross-sales of high-margin products, and disciplined cost management, position it well for continued margin expansion.
Beyond FY24, Chewy is expected to return to mid-single-digit to high-single-digit revenue growth, with sustained margin improvement driven by the favorable mix of high-margin products and services. However, SG&A leverage may be limited as the company reinvests in growth initiatives.
One potential near-term challenge for Chewy’s stock is the possibility of additional stock sales by private equity owner BC Partners, which could cap share price appreciation. However, the company’s long-term fundamentals remain strong, and analysts continue to rate Chewy as an “Outperform” with a target price of $35.
Chewy’s Q2 FY24 results mark a positive turning point for the company, with growth in active customers, strong margins, and an optimistic outlook for the remainder of the year. While the guidance remains conservative, the company’s strategic initiatives and disciplined execution provide a solid foundation for future growth. As Chewy navigates the competitive landscape and evolving market conditions, its ability to capitalize on high-margin opportunities and maintain customer engagement will be key to sustaining its upward trajectory.
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