We’re getting very close to pounding the table on this name long-side. We’re about 3-6 months from an inflection in the sales and margin rate of change. We still have the call options on an international launch and further penetration into non-vet services while it also sounds like economics are favorable for CHWY on the Trupanion insurance partnership launching in spring. CHWY in the after market is getting close to a trough EV/Sales multiple. We may want to de-risk Macro Quad4 in 2Q22 before really getting bullish on this name, though the signal and business trends could trump the quads on this one. We still see CHWY as one of the best Tail stories in retail with an expanding powerful online consumer ecosystem around pet care, which should be one of the best growing consumer categories of the next decade. On a rate of change inflection, CHWY is likely to trade at 3x+ Sales, which suggests about $75-$80 in 12 months (vs $52 after hours), and $125-$150 over a TAIL duration with Int’l growth in play.
On the quarter, yes, it was another weakish CHWY print. The trend fundamentals continue to see pressure. Revenue was in-line with expectations though with slightly light customer adds and slowing revenue trends. EBITDA missed with the company seeing inflationary pressures on both gross margin and SG&A. On the COGS side it was elevated inbound freight costs and product cost inflation dragging around 100bps in the quarter. On SG&A expected cost increases from higher wages, hiring incentives and benefits drove $30mm in SG&A growth. The company’s talent leak to GME has to be reasonably expensive to replace near term and the inflation headwinds are pushing out the EBITDA target, even as we continue to see decent revenue numbers.
But let’s put these numbers and trends into context -- the company signaled gross customer adds are still being added above prepandemic levels, suggesting a structural online shift in the category. In addition, spend per customer was up 5.4%, accelerating on a 1 and 2 year basis. Importantly, let’s look at a quick 3Q revenue growth ecommerce scoreboard. CHWY +24%, Etsy +11%, AMZN Online Stores +3%, OSTK -6%, Wayfair US -21%. CHWY is growing on top of its pandemic growth ramp, yet this stock is trading near trough EV/Sales and the others in the list are far from trough and some just off peak on the latest market selloff.
If you’ve got duration on your hands– we think you definitely want to be buying CHWY on this print. Bottoms are processes, not points. And CHWY is nearing the end of its bottoming process, while meaningfully outperforming the e-comm peer group, trading near a trough valuation, and all that with a top line inflection over 3-6 months and likely launch of an Int’l growth strategy. TAIL upside is close to 3x where the name is trading after-hours. Best Idea Long.
