Chewy Should Be Able to Bounce Back From Recent Earnings Miss

Chewy experienced substantial losses during the second quarter but its growth remains strong. 

Last week, Chewy released its second-quarter earnings report and the results were underwhelming. The company experienced heavy losses during the second quarter and the company’s fiscal guidance was disappointing. 

However, it wasn’t all bad news for Chewy. The company did show a big jump in profitability as well as strong subscriber growth. But ultimately, neither of these factors were enough and shares of Chewy fell more than 6% midday.

What happened during the second quarter?

Chewy is an online retailer for pet care products, an industry that is growing quickly. This growth was clear from Chewy’s second-quarter revenue, which grew more than 42% year over year. The company brought in $1.15 billion in revenue, beating the guidance range of $1.12 billion to $1.14 billion.

The company’s gross margin was up by 23% thanks to improved product margins. And best of all, Chewy’s active subscriber base grew 39% to reach 12 million customers. Not only that, but each active subscriber spent an average of $352, which is up 10% from a year earlier.

But these impressive gains were overshadowed by the company’s heavy second-quarter losses. Here is a breakdown of each of these losses:

MetricSpending in Q2Year over year change
Selling, administrative, and general expenses$355 millionUp 75%
Advertising and marketing expenses$111 millionUp 24%
Total operating expenses$335 millionUp 55%
Total operating losses$82.9 millionUp 32%

Chewy did raise its full-year fiscal 2020 guidance but not by much. Previously, the company expected its full-year revenue to fall between $4.675 billion and $4.75 billion. After the earnings report, Chewy increased this figure to between $4.75 billion and $4.80 billion. 

What’s next for Chewy? 

Analysts are pretty evenly split when it comes to Chewy but on Monday, Nomura Instinet upgraded the company from neutral to buy. Analyst Mark Kelley said that the concerns over Chewy’s earnings report are largely overstated. Kelly added, “…we remain confident that the core business continues to perform.”

In 2009, pet owners spent a total of $45.53 billion on their pets. In 2019, that number is expected to reach $75.38 billion. People love to spend money on their pets and Chewy has a unique business model. 

The company continues to innovate and find new ways to help its subscribers, like when it launched Chewy Pharmacy. This online tool makes it easier for pet owners to manage their pet’s medications. If Chewy can get a handle on its heavy losses and continue to reach new subscribers, the company should be well poised for future growth.