Americans love pets and the COVID-19 pandemic accelerated this love. A 2021 report by The American Society for the Prevention of Cruelty to Animals said that one in five households or 23 million American households adopted a pet during the lockdown. And even better, 90% of dog owners and 85% of cat owners still have their pets and have no intention of rehoming them. This data pulls at the heartstrings.
But why are we talking about pet adoption in an article meant for stocks? That’s because the average cost of owning a dog varies from $1,500 to $9,900 a year, and online pet company Chewy (NYSE: CHWY) is in a prime spot to take advantage of this phenomenon.
Including the increased rates of pet adoption during the pandemic, a 2021-22 National Pet Owners Survey conducted by the American Pet Products Association (APPA) said 70% of US households or 90.5 families owned a pet. These are huge numbers!
A look at Chewy’s Q1 earnings
On June 1, Chewy announced its numbers for Q1 of 2022 and beat market expectations handsomely as the stock surged almost 15% that day. Net sales came in at $2.43 billion, up 13.7% from the corresponding quarter in 2021. However, adjusted EBITDA declined by 21.8% in the same period to $60.5 million.
Analysts expected the company to post a loss in Q1, as it has been doing throughout its 11-year history. However, the markets were pleasantly surprised when it reported its first-ever quarterly profit.
Chewy reported a profit of $0.04 per share while analysts expected a loss of $0.14 a share. Chewy CEO Sumit Singh said, “Fiscal year 2022 is off to a good start as we drove solid 14 percent top-line growth and delivered sequential improvements in gross margin and profitability. Our first quarter results are a testament to the resiliency of the pet category and clearly demonstrate our ability to execute against our strategic priorities.”
The company reported 20.6 million active customers at the end of Q1 and this number is defined as a customer who made at least one purchase from the platform in the last year. Chewy closed fiscal 2021 with 20.7 million customers.
What next for Chewy stock and investors?
During the earnings call, Singh said that the number of pet adoptions is slowing down in the US. While that is not great news, Chewy still has a large addressable market to make inroads into. One huge positive in the company’s favor is that pet owners will continue to spend on their pets. Pet owners will continue to spend on their pets across economic cycles making Chewy somewhat recession-proof.
Another positive for Chewy is that it ended Q1 with $604 million in cash and zero debt. The cash pile should hold it in good stead even in an economic downturn.
Additionally, the company’s Autoship program is akin to a subscription service allowing Chewy to derive stable cash flows. Customers can choose to have certain products delivered to them on a fixed schedule. Revenue from the Autoship program accounted for 72.2% of customer sales in Q1, up from 69.3% in the corresponding quarter in 2021.
Chewy data says that the first-year shopper on Chewy spends $200 a year, and by year five the spend goes up to $700. Clearly, stickiness means increased spending on Chewy.
The tough part of Chewy’s journey begins now. As long as it was a loss-making company, analysts just wanted it to hit a profit. Now that it has put its loss-making quarters behind it, expectations from Chewy will only go higher. It will be expected to sustain its profitability.
Chewy stock closed at $32 on June 21. Analysts have an average price target of $48.54 on the stock. That’s a potential upside of over 40%.