CHWY | Better Than Most, Waiting For Sustained Acceleration

CHWY put up some of the best growth in ecommerce once again with 14.7% growth accelerating 130bps from last quarter.  Growth came from increased spending per customer, up 16% YY for the quarter, which management suggested is from increased units, inflation not being the major driver.  Customers were up just barely QoQ.  Adj EBITDA came in well ahead, up 82% YY at $110mm, we were looking for $90mm. Though we should note about half of that increases in incremental stock based comp that gets added back.  Gross margin was up 92bps, while advertising and SG&A deleveraged.  GAAP Net Income up about 20%, not as good as the adjusted EBITDA optics, but still, there are not many retail companies delivering double digit revenue and profit growth this Q.  Management started to detail out its international expansion talking about launching in Canada in 3Q.  As someone who used to drive through Canada to get to Michigan, I don’t consider Canada a true international expansion. If that is all we get visibility on over the next 12 months, we’ll be disappointed.  The simple math on market opportunity for Canada is 1/10 that of US.  Profitability in Canada should be appealing given the ability to leverage much of the US infrastructure, but Europe and even into parts Asia/Australia is where we think the growth looks much more appealing in international.  The TAIL setup looks in check, continued growth in the US with customer growth slowly getting better, adding in service offerings, proving out profitability in the model, and international starting. The TREND setup is where we are being more patient.  Topline trends are stuck in the low double digits and customers still aren’t growing despite ramping ad spend.  The company is guiding to slightly slowing revenue growth.  The main thing that would get us much more bullish, visibility to a sustainable acceleration in growth, we don’t have yet.  CHWY is on our Long bias list after coming off the Best Ideas Long in Feb with the stock around $50. We think you have a TAIL double or better here, but with a big multiple stock in Macro Quad4, we’re going to wait for the TREND P&L setup to signal more bullishly before making this a Best Idea Long.