A mixed print for CHWY as it deals with the slowing trends we have seen in ecommerce in aggregate on the top line along with several cost pressures around inflation and supply chain dragging on margins while the company continues to invest to drive customer satisfaction. Revenue grew 17% in 4Q slowing from 24% with the company noting ~$50mm (~2.5%) in revenue lost from supply chain and out of stock issues that built mid quarter around the Omicron spike. So even with that pressure CHWY was again one of the best growers in ecommerce. CHWY +17%, Etsy GMS +12%, AMZN Online stores +1%, EBAY US GMV -2%, W US -9%. We’re a month or two away from easier sales comparisons and around the same time it will get the launch of the new insurance partnership. So we think we are likely to see revenue trends improve almost imminently. Then gross margins have seen all kinds of pressure from product cost inflation, to freight, and outbound shipping. Those headwinds are now moderating, and price adjustments are catching up with the cost line, so the company is signaling 4Q is likely to be the peak of margin pressure, meaning the rate of change for gross margins from here should be positive. We think gross profit is inflecting from slowing down to mid teens growth this Q, to accelerating into the mid 20s by year end. With CHWY trading near trough EV/sales, that’s a setup we’d be buying. Management continues to invest in fulfillment labor, capacity, systems, new efficiencies and business opportunities. There are intentional cost increases, but also many transitory cost pressures at the same time the CEO is noting near term customer acquisition and wallet share will be competitive with consumers feeling inflation pressure and with some return to brick and mortar shopping. But the company remains focused on the value proposition for customers with plans for expanded fresh food and a new loyalty program. Also in the works is a new sponsored products advertising model planned for 2023 that will provide some incremental margin opportunity and enable brands to pay to highlight product to Chewy customers on the Chewy platform.
Chewy remains a powerful online consumer ecosystem in a one of the strongest consumer categories. Active customer spend continues to rise and the company is adding initiatives to drive further pet parent wallet share. The long term US market opportunity remains massive and there is still the international lever to be pulled down the road. With improving revenue and margin trends in 2022 we think this stock can revisit 3-4x EV/sales or $75-$100 over a year’s time and triple over a tail duration.
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