CHWY put up a solid 3Q. Revenue accelerated to +14.5% from 12.8% last Q, slowing slightly on a 2 year basis. Customers ticked up slightly Q/Q, growing just under 1% YY while spending per customer was up 13%. Gross margin expanded 200bps driving an 800bps acceleration in gross profit growth. EBITDA beat handily at $70mm, up over 10x YY. The company is seeing slower growth, but expanding margins, as it delivered its 3rd straight Q of real EPS. CHWY is showing it can make money in a slowing consumer environment with inflationary pressures suggests there is clearly margin opportunity here at scale. The margin is being aided by pricing actions, while repeat customer demand and spending remains strong. Improved in-stocks are also helping to win sales and reduce costs by having shorter shipping distances to the consumer from the fulfilling DC. The company is also scaling into its new more automated logistics facilities driving efficiency.
The only problem for CHWY right now is the low customer growth, as it like many ecomm players continues to churn off customers added during the pandemic. That, along with general pressure on consumer spending, is likely driving the revenue slowdown implied in guidance. Management noted the hardgoods is impacted both by the consumer mindset (discretionary spending) and the fact that lapping the pandemic boom pet households are flat to down at the moment. Those will eventually return to trend driving growth on the hardgoods side. Still CHWY this quarter was again the best growth in the ecommerce landscape. CHWY +14.5%, AMZN Online Stores +13% (with help from Prime Day Shift), EBAY US GMV -3%, Etsy GMS -4%, Wayfair US -6%, OSTK -33%. CHWY likely remains a top grower in the coming 2 to 3 quarters as well.
CHWY is on our Best Ideas Long list, though it got shifted down mid-summer when the stock hit the $50s. As outlined in our weekly position monitor note this Sunday, we came into this quarter cautious on the TREND setup given the rally in the stock since the last earnings and the fact that we didn’t see a sustained acceleration in the business over the coming 2 or 3 quarters. With the slight selloff in the aftermarket, the stock is down ~15% for the week. We think until we hit a point of greater customer adds and a sustained acceleration in the P&L, which we think is a few quarters down the road, this stock is likely range bound from $30 to $50. Everything around the long term story looks on track. Customer cohorts continue to increase spending. Early reads on new service offerings in insurance and wellness are positive. The company continues launching new offerings to drive wallet share for the pet parent. The business is scaling into more efficient logistics infrastructure driving margin improvement. We think this stock is a TAIL double, but before it moves higher on our Long list we’ll likely wait +/- 6 months until the consumer and macro outlook improves and the TREND P&L setup looks more bullish.
