CHWY | Blistering Results

CHWY delivered in 4Q, and then some. Put up a blistering net customer add number of 1.4mm new customers – ending the year with 90.2mm active (and extremely sticky -- w 68% on Autoship) customers. Importantly it did this while driving an incremental 6.7% growth in average spending per customer – for total revenue growth of 50.8% in the quarter. The gross margin looked spectacular – 27.1% -- the highest GM in company history by over 150bp (and 300bp above last year), as we continue to see CHWY increase its reach into higher margin health care and a 570bp increase in proprietary brands (which now stands at 21% of total).  All in, adjusted EBITDA margin came in at 2.6%, and EBIT was positive to the tune of $21.6mm – the first positive EBIT number in CHWY history. EPS was a positive $0.11 per share, as the company achieved GAAP profitability three quarters before we otherwise modeled. Management guided to what the Street already discounted in the stock – that new customer acquisitions will decelerate closer to 2019 levels on a quarterly basis in FY21. That suggests a run rate of about 700k new customers per quarter. We’re tracking in our model closer to 1mm, with sustained acceleration in average spending per customer. The company guided to a revenue number for the year that is spot-on with the consensus of about $8.85bn – below our $9.65bn. We’re also looking for sustained strength in the gross margin part of the EBITDA margin equation, and are sitting above company guidance for the year. Our only gripe is that the company is remaining extremely tight lipped on International growth, which is the next big driver to new customer acquisitions (its growth into services will increase spending per customer). We’re assuming that customer additions tick back up to a quarterly rate of 1.5mm per quarter starting in 2H22 as CHWY likely enters Canada (leveraging US Distribution Center infrastructure), before expanding into the UK. We have capex going up accordingly to invest in new markets – more than doubling from last year’s $130mm to $300mm in two years, which still leaves the company with a ballooning cash balance to $3bn -- $2bn of which we’re assuming will go toward stock repo (CHWY has no debt). The company’s EV/Sales multiple has come down by 20% over the past month alone to 3.6x – which is fair given that the rate of change in customer adds is likely to slow. But as noted, we think the goals that the company set are more than achievable, and our top line is nearly $2bn ahead of the Street in FY23, which should lend support to the sales multiple at it beats on top line while laying the base to a sustainably profitable P&L and bullet proof balance sheet while it dominates the pet care ecosystem. We could justify a price up to $130 until the International launch simply based on the US category growth alone – then it gets valued much higher for taking its dominant business model global. CHWY remains a Best Idea Long for us.