This quarter may look weak relative to expectations with a slight revenue miss and higher SG&A driving an EBITDA miss, but this was actually a print of strong results for CHWY. Recall that ecommerce stalled out right around the time that CHWY printed its 1Q results, and that weakness persisted through June and July which we learned on the calendar ecommerce prints around the end of July. Census US ecommerce growth trended around +HSD% in the May/June/July period, Amazon said it was +mid-teens since around mid-May, Wayfair US down ~mid-teens. Meanwhile Chewy delivered +27% growth on top of +47% last year. The other “covid bump” ecommerce players (like W and ESTY) are seeing US customers drop Q/Q while CHWY continues to grow its customer base and take significant share in the online pet category. Maybe the aftermarket selloff is our fault (and the sell side’s) for not managing down expectations after online demand clearly took a hit in late spring/summer. It's also confusing why CHWY rallied to above $95 after that online slowdown was known, only to give it back into and on this print. But the stock weakness is not reflective of the quality of execution and the confirmation of the long term call. Management noted that online traffic for the category was flat to down in 2Q, when CHWY grew, and traffic started recovering around late July and into August. Supply chain limitations in certain categories are still slightly constraining sales, but this is improving on the margin. Gross margin was in line with our model up just over 200bps. The company ramped SG&A in wages and fulfillment to be sure to keep up with demand, and the advertising market saw big near term rate increases driving higher marketing. Management said rates have moderated, but are still elevated relative to 2Q. Outside of near term margin pressures, little has changed, and management’s commentary on the call only strengthens the long term bull case. Customers are being added at rates above 2019 on a gross basis and spending per customer continues to follow historical cohort trends, driving spending per customer up YY on a difficult comparison. We flagged last quarter that the Trend model was reflecting lower growth, and that remains the case, but the Tail model is one of the best in retail.
CHWY has been a top long of ours for about 16 months, making it a Best Idea around $44. We’re still waiting for the key catalyst of the company signal of international growth, as opposed to the usual tagline “more than 1 year less than 5 years”. Though this quarter management seemed to communicate a desire to master the ecosystem in the core US market, before replicating it in other markets. It’s also clearly a difficult time to hire, invest, build internationally given the pandemic, so we’re taking the international launch out another 2 quarters in our model, now for early 2023.
We think this stock is worth around $90 to $100 today, and it’s a long term compounder taking share in a large growing TAM still with the international growth lever to be pulled. The trend is still not in Chewy’s favor for perhaps the next six months, after which we’re inclined to take this category killer higher on our Best Ideas list. If you’ve got duration, you want to be buying on this selloff.
