Maybe I'm a little biased. Chewy (CHWY) reported last night. No, I'm not in the stock. I am, however... a recent convert to the service.
Many of you have met "The Moosh" on social media. Well, being the fancy pants kind of pet owner that I am, I feed good ole Mooshie a higher end dog food along with fresh vegetables at every meal. I had always either gone down to my local PetSmart (they closed), or ordered on Amazon (AMZN) . Suddenly, a few weeks ago, our preferred kibble was not available on Amazon. Walmart (WMT) ? I'll try Walmart. No dice there, either.
What to do? Feed the Moosh common dog food rubbish? Hey, what about Chewy? So, I created an account and checked it out. There it was. The dog food that I (my wife makes my buy) prefer, and not at a rip-off price either. Woo. Hoo. Two days later, my wonderful little mutt who's smart enough to pray (or at least shut up and listen) with me every day was eating like the princess she is.
The Quarter
For the firm's fiscal fourth quarter, which ended January 29th, Chewy posted an adjusted EPS of $0.16 (GAAP EPS: $0.01) on revenue of $2.707B. The top line beat Wall Street, while showing year over year growth of 13.4%. That bottom line profit was a surprise, and absolutely crushed expectations for a decisively negative number.
On a GAAP basis, gross margin of 28.1% was good for a year over year improvement of 270 basis points, while net margin of 0.2% showed a year over year improvement of 270 basis points as the firm produced net income of $6.1M. That includes a share based compensation expense of $50.2B, which explains the 15 cent gap between the adjusted and GAAP EPS results. Adjusted EBITDA came to $91.968M, up from a loss of $28.12M for the year ago comp. This took adjusted EBITDA margin from -1.2% to 3.4%.
Guidance
For the current quarter (Q1), the firm sees net sales of $2.72B to $2.74B, which would be good for year over year growth of 12% to 13%. Wall Street had been looking for a rough $2.67B, so this is positive.
For the full fiscal year, Chewy sees net sales of $11.1B to $11.3B. which would be growth over last year of 10% to 12%. Wall Street was in between $11.1B and $11.15B on this number, so the guidance does take the mid-point of the range higher.
Now, here's the catch. The firm sees adjusted EBITDA margin anywhere from flat to down 50 basis points for the full year. This is why the market knocked the stock a peg or two lower overnight. The deal here is that the firm plans to undertake numerous investments that will target an increased value proposition and lay the groundwork for future growth and eventual margin expansion. In short, Chewy is going to invest in the business this year.
Fundamentals
Operating cash flow improved for the quarter reported to $100.552M, up from $-65.967M for the same quarter one year ago. After accounting for capital expenditures, free cash flow for the period improved to $42.103M from $-113.439M.
Turning to the balance sheet, Chewy ended the period with a cash position of $677.385M, inventories of $675.52M and current assets of $1.52B. Current liabilities add up to $1.769B, leaving the firm with a current ratio of 0.86, which is really below the standard that I like to see, In addition, one never knows in this environment if the value of a retailer's inventories can be counted on. Often, they can not. The firm's quick ratio stands at a paltry 0.48.
Total assets amount to $2.515B. This includes goodwill of just $39.442M worth of goodwill. That's not an issue. Total liabilities less equity comes to $2.301B. Though this balance sheet's current situation does not "balance" as well as we would like, I would like to mention that there is no entry for debt of any kind. The liabilities are all payables and leases.
This balance sheet does not yet get a passing grade. Over the past year, current assets grew faster than current liabilities and total assets grew faster than total liabilities. This balance sheet is not a lost cause.
Wall Street
I have only found five sell-side analysts who have opined on CHWY since these results were released and are also rated at four stars or greater by TipRanks. Across those five, there are three "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings. One of the "holds" did not set a target price, so we only have four targets to work with.
The average target across the four is $47.25, with a high of $53 (Mark Mahaney of Evercore ISI) and a low of $35 (Lee Horowitz of Deutsche Bank). I see no point in pulling out the highs and lows as that would leave us only two targets.
The Chart
CHWY has traded in an upward sloping channel since late September/early October. The stock is weaker this morning, trading with a $36 handle, which will test the lower trendline. This is key. Relative strength is soft. The daily MACD (Moving Average Convergence Divergence) is as well, but had started to show signs of curling in the right direction ahead of earnings. The stock is already trading below its 21 day EMA (exponential moving average) as well as its 50 day and 200 day SMAs (simple moving average).
I think that if this lower trendline holds that an investor could initiate CHWY with a partial. Maybe 1/8 of one's intended allocation. That's what I usually lead with. That said, we have to see this name hold that line. If this stock loses $36, I will wait until I see a bottom.
This is speculative. Yes, the fundamentals are improving. They needed to. The balance sheet has to keep doing so. What I am telling you is that this stock is a work in progress. But, its not trash. Belongs on the watch list at a minimum.
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