Another solid quarter from Chewy, which is a Best Idea Long. The company put up positive EBITDA of $5mm, well ahead of the Street’s estimate of a loss of $10mm. It beat revenue by 3%, and surprisingly took up 4Q sales guidance by nearly 10% as it noted accelerating trends into October. Chewy added another 1.2mm customers this quarter, ahead of what we expected and spending per customer was up 4%, less than last Qs 9% growth, but growth in spend per customer is impressive given the large customer gains since new customers spend much less than retained customers historically. Autoship penetration remains high at 69.2% which was an improvement vs last quarter with still high customer acquisition (ie new customers must also be joining Autoship). The Chewy revenue machine is humming and the CEO shared a unique data point. He said the 2Q 2020 cohort is 50% larger than the 2019 cohort of the same quarter and it’s spending 10% more. That step up in revenue on incremental customer wins is very bullish, there's still lots of good growth remaining. Management is also highlighting the pet pharma business stating that it is now at $500mm in online pet pharma revenue, noting that makes it the biggest online pet pharma business in the US after launching just a couple years ago. Gross margin was up 180bps, similar to last quarter on tougher compare as management noted a less promotional environment and private label penetration growth. The only negative we see is a slight slowdown in revenue from 47% to 45%, though guidance implies steady rate of change 4Q and we expect a beat which would mean a reacceleration. The 4Q compare is much easier, so not reaccelerating would be a clear negative. The next big catalyst for CHWY will likely be International. Management is not detailing an International expansion yet, we think CHWY is putting the wheels in motion here, but is keeping the announcement in its back pocket until it needs to show the next leg of growth. The good news is that Int’l expansion is not in the stock today – even with the stock pushing all time highs.
A few small changes to our model, we’re taking 4Q customer additions up from 900k to 1mm given the continued momentum and record covid cases being a reason for more customers to move to online in 4Q. We’re taking operating margin down slightly revising gross margin higher on this beat and SG&A higher as well with management noting continued costs related to Covid in labor/logistics and rising marketing spend partially due to increasing market rates. We have the move to International in our model next year (Canada to start) though management has yet to officially address that – we think it wants to keep expectations in check.
