Online pet food retailer Chewy (CHWY) is one of the fastest-growing companies around.
In fact, Stockrow gave Chewy Inc. (NYSE: CHWY) a revenue growth rate of 47.36% for the quarter ending on 31 July 2020. Chewy’s revenue growth rate grew from 46.22% for the quarter ending on 30 April 2020 and 24.38% for the quarter ending on 31 January 2020.
“We ended the quarter with 15 million active customers, an increase of 3.7 million compared to the end of first quarter 2019 and the fastest acceleration of new customer acquisition in the company’s history,” Chewy CEO Sumit Singh said of last quarter’s financials. “Net sales per active customer grew 6.6% to $357 when adjusting to exclude the extra week in 2018.”
Is Coronavirus driving Chewy’s Growth?
Pet Food Processing claims the Coronavirus pandemic added 1.6 million customers to Chewy’s platform in First Quarter 2020. Additionally, Singh claims new orders made up 11% of Chewy’s business in the last quarter.
“Also, after the COVID-19 outbreak, our existing customers started creating bigger baskets,” Singh claims. “These baskets had a higher mix of consumables in them. We believe these larger baskets with a higher mix of consumables were evidence of pandemic-related pantry stocking, and we estimate this benefited first quarter net sales by approximately $70 million.”
“The surge in orders increased our shipping volume in March by over 50% compared to February,” Singh claims. If Singh’s claims are true, COVID could be the crucial factor driving Chewy’s growth. Hence, Chewy (NYSE: CHWY) could collapse when the pandemic ends.
Is Chewy’s Growth Sustainable?
Notably, Chewy Inc. (CHWY) now operates nine U.S. fulfillment centers and plans to open a tenth center in 2020, Pet Food Processing reports.
Pet Food is a growing market. Inc. put four pet-food and treat manufacturers on its 2020 list of fastest-growing privately owned American manufacturers. For example, the Carnivore Meat Company’s revenues grew by 187% between 2017 and 2020, Pet Food Processing claims.
Additionally, Pet Food Processing claims Carnivore Meat’s revenues grew by 204% between 2016 and 2019. The Carnivore Meat Company manufactures premium raw, frozen, and freeze-dried pet food and treats. Carnivore’s brands include Vital Essentials, Vital Cat, and Vital Dog.
Similarly, Mid-America Pet Food’s revenues grew by 126% between 2017 and 2020, Pet Food Processing claims. Mid-America manufactures VICTOR Super Premium Pet Food and Eagle Mountain Pet Food.
Finally, Pet Food Processing claims Smart Paw’s Meowijauna brand’s sales grew by 1,355% between 2017 and 2020. Thus, premium pet food is a fast-growing sector.
Why is Pet Food Booming?
I think the high-end pet-food industry is booming because coronavirus people at home with their pets. People are lonely so they are focusing more time and effort on pets.
In addition, many people are afraid to drive to Walmart (NYSE: WMT) or Costco (NASDAQ: COST). That fear drives people to shop on Chewy because they want high-end pet food without the big-box shopping experience.
Another reason people are shopping on Chewy is that work-from-home professionals do not want to take time off from work to drive to Kroger (NYSE: KR) or Target (NYSE: TGT). Instead, those people shop on Walmart.com, Chewy, or Amazon (NASDAQ: AMZN) for pet food and supplies.
Work-from-Home is the New Normal
This trend is good for Chewy (NYSE: CHWY) because I do not think those workers will return to the office or start shopping at big box stores again. Korn Ferry estimates over half of American professionals are afraid to return to the office because coronavirus, CBS News reports.
Similarly, CNBC estimates 52% of US senior technology executives say their employees will not return to work this fall. In addition, 74% of American senior executives think around 50% of their employees will work remote for the foreseeable future.
Importantly, only 10% of bosses the CNBC Technology Executive Council surveyed said their workplace because of majority remote work. Instead, 48% of surveyed executives said their team’s productivity grew during the pandemic. Plus, 40% of executives surveyed claimed their workers’ productivity stayed the same during the pandemic.
Consequently, I think Work-From-Home is the new normal. Therefore, I predict Chewy’s customer base of work-from-home professionals will keep growing.
Pet Ownership Grows
Packaged Facts market researchers estimate the US pet ownership rate will grow by 4% in 2020.
As a result, the number of pet-owning American households will grow from 68 million to 71 million in 2020, Pet Product News claims. Overall, Packaged Facts estimates 54% of US households had pets in August 2020.
Thus, Packaged Facts’ estimates justify Mr. Market’s faith in Chewy (CHWY). Chewy’s stock price grew from $29.62 on 2 January 2020 to $56 on 25 September 2020 and fell to $54.97 on 29 September 2020. Chewy’s share price hit a high of $70.10 on 2 September 2020.
Does Chewy Make Money?
Cynics like me; however, will ask, is Chewy (NYSE: CHWY) making money? The answer is no.
Chewy reported a quarterly operating loss of -$32.27 million on 31 July 2020. However, that quarterly operating loss shrank from -$47.49 million on 30 April 2020, and -$60.30 million on 31 January 2020.
On the other hand, Chewy reported a quarterly gross profit of $433.36 million on 31 July 2020. The quarterly gross profit grew from $378.71 million on 30 April 2020 and $326.15 million on 31 January 2020.
In contrast Chewy reported a quarterly common net loss of -$32.82 million on 31 July 2020. The quarterly common net loss fell from -$47.97 million on 30 April 2020 and -$60.94 million on 31 January 2020.
How Much Cash Does Chewy (CHWY) Generate?
Currently, Chewy (CHWY) burns cash instead of generating it. For example, Chewy reported a negative quarterly operating cash flow of -$28.89 million on 31 July 2020.
In contrast, Chewy reported a $20.75 million operating quarterly cash flow on April 30, 2020. Moreover, Chewy reported a $74.35 million operating quarterly cash flow on 31 January 2020.
Chewy reported a -$38.69 million negative quarterly ending cash flow on 31 July 2020. The quarterly ending cash flow fell from $192.53 million on 30 April 2020. Chewy began 2020 with a quarterly ending cash flow of $76.22 million on 31 January 2020.
Chewy has More Debt and Less Cash
I think Chewy borrows money to finance its operations because of the financial cash flow. Chewy reported a quarterly financing cash flow of $23.38 million on 31 July 2020. The quarterly financing cash flow grew from $170,000 on 30 April 2020, and $1.89 million on 31 January 2020.
Chewy has less cash than before. Chewy began 2020 with $212.09 million in cash and short-term investments on 31 January 2020. That number fell to $192.53 million on 30 April 2020 and $153.84 million on 31 July 2020.
Thus, Chewy has more debt and less cash. For instance, Chewy had $261.84 million in long-term debt on 31 July 2020. That number rose from $229.56 million on 30 April 2020 and $200.44 million on 31 January 2020.
Chewy vs. Amazon
I think Chewy (NYSE: CHWY) is a terrible investment because it generates no cash. Additionally, I think Mr. Market overpriced Chewy at $56 a share on 25 September 2020.
Predictably, Chewy pays no dividend which gives this stock no safety margin. That makes Chewy dangerous, but it reminds many people of Amazon (NASDAQ: AMZN). Remember, Amazon sustained huge losses it became one of Mr. Market’s favorites.
Amazon (AMZN) reported annual net losses of -$241 million in 2014 and -$39 million in 2012 for instance. Yet Amazon reported an annual common net income of $11.602 billion in 2019.
However, I think comparing Chewy to Amazon is stupid because Amazon’s resources are far greater than Chewy’s.
Why Chewy cannot compete with Amazon
Amazon reported quarterly revenues of $88.912 billion, a quarterly gross profit of $36.252 billion, and a quarterly operating income of $5.843 billion on 30 June 2020. In contrast, Chewy reported $1.7 billion in quarterly revenues, a quarterly gross profit of $433.36 million, and a quarterly operating loss of -$32.27 million on 31 July 2020.
Furthermore, Amazon reported a quarterly operating cash flow $20.605 billion, an ending cash flow of $10.337 billion quarterly ending cash flow and a quarterly financing cash of $7.408 billion on 30 June 2020. Chewy reported a quarterly ending cash flow of -$38.69 million, an operating cash flow of -$28.89 million, and a financing cash flow of $23.38 million on 31 July 2020.
Finally, Chewy had $153.84 million in cash and short-term investments of $153.84 million, and total assets of $1.145 billion in total assets on 31 July 2020. Amazon (AMZN) had$71.391 billion in cash and short-term investments and total assets of $258.314 billion on 30 June 2020.
Given those numbers I cannot see how Chewy can compete with Amazon. Amazon has the money and resources to sell pet food at a loss to drive Chewy out of business, if Jeff Bezos wishes. Thus, Chewy could depend on Bezos’ goodwill for its future.
I think those circumstances make Chewy (CHWY) a terrible investment that people need to avoid.