It's all about the growth. If there have been pandemic winners, it has been those that do e-commerce well, and then experience wild growth once consumers depend on e-commerce not just for convenience, but for their own safety. I had been long Chewy (CHWY) early on in this pandemic. The stock is now up over 173% year to date. I made some lunch money. Could have, at this point, made more. Such is life. I'll tell you why I got out in a few. First, this firm is excelling. Let's focus on that.
(For more on CHWY, see Shares of Chewy Soar but Our Price Target Doesn't)
For the firm's fiscal third quarter, Chewy, which is majority owned by PetSmart, reported EPS of $-0.08, beating expectations by a nickel. The firm also posted revenue of $1.78 billion, another beat, and good for year over year growth of 44.7%. Active customers increased to 17.788 million, well above Wall Street's consensus of 17.387 million. However, net sales per active customer did fall short of consensus, at $363 versus $369 over the past 12 months.
Margins pleasantly surprised as well. Gross margin landed at 25.5%, producing adjusted EBITDA margin of 0.3%. These numbers outperformed the street's view of 24.9% and -0.5%, respectively. The firm also guided Wall Street higher on revenue for the current quarter. The firm is looking for sales in a range of $1.94 billion to $1.96 billion. Wall Street had been down around $1.79 billion. Wall Street, or at least the aggregate view of the 14 sell-side analysts that cover the name is still for quarterly EPS of $-0.10 that will leads to full year EPS of $-0.43.
On the performance, CEO Sumit Singh seemed on Jim Cramer's Mad Money last night to downplay the pandemic as a driver for the sales growth, and more or less credited current trends in pet retail. Said Singh, "We don't believe the growth that we're delivering right now is pandemic driven."
While there may be some changing trends in pet related retail, this firm certainly benefited from the pandemic. For one, more consumers are now taking care of pets these days, if only for companionship. Secondly, while sales for this firm had been growing on a low to mid 40%-ish pace pre-pandemic, the last quarter prior to the pandemic did see sales growth drop to 24%. Then, sales returned basically to trend.
I am sure that more pet owners overall has created more customers. More customers has created more loyal customers. Why did I sell my shares months ago? I have a dog. I have written on "Mooshi" more than once. I buy her food, and occasionally toys on the internet. I intentionally went to the Chewy website. Before going through with my purchases, I checked Amazon (AMZN) . There was not one item on my list that day that was cheaper on Chewy. Every single thing I wanted was either the same price on both Chewy and Amazon, or slightly cheaper on Amazon. I already had an Amazon account. Why spread myself out even more when Amazon can fill my dog's needs and actually do it for a little less? There may be some novelty in having an account at a website focusing solely on your pets, but for me, I know what I want, and I know what Mooshi needs. I can satisfy us both at the same time, in the same purchase. I just did not see the need. If Amazon decides that Chewy has taken too much market share, they will deal with them then.
Wall Street Thoughts
I see four highly rated analysts having opined on CHWY this morning. Three "Buys" and a "Hold." Average price target among the four would now be $89.25, after the "Hold" (Deepak Mathivanan of Barclays) reluctantly lifted his PT from $60 to $80, while also labeling the stock fully valued. I kind of think I agree with Mthivanan.
For those long the name, the technical set-up created by the cup with handle would allow for a realistic target price of $87. For those not in the name, a purchase of 100 shares at the last sale could be paired with the sale of a (covered) $85 call expiring on January 22nd for about $5. While this caps any profit by expiration, this also knocks five bucks off of net basis. Basically, the investor would be paying a net $74 with the hopes of being called away in six weeks at $85. That's 14.9%. Not bad for a month and a half's work. If it plays out that way. If the stock comes in, you do it again, and drag that net basis even lower.