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Chewy (CHWY) Q2 Loss Narrower Than Expected, Sales Up Y/Y

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Chewy, Inc. (CHWY - Free Report) reported better-than-expected second-quarter fiscal 2020 results. This online pet products retailer posted narrower-than-expected loss. Further, the company’s net sales surpassed the Zacks Consensus Estimate and improved year over year.

Quarterly results gained from growth in the company’s active customer base. Sales to autoship customers were also robust. Management provided a positive sales outlook for the third quarter as well as for fiscal 2020.

Q2 Highlights

The company’s bottom line came in at a loss of 8 cents per share, narrower than the Zacks Consensus Estimate of a loss of 15 cents. In the year-ago quarter, it reported a loss of 10 cents per share.

Net sales amounted to $1.70 billion, which surpassed the Zacks Consensus Estimate of $1.64 billion. Moreover, the top line rallied 47.4% year over year. Key drivers to this upside were 37.9% rise in active customers and a 3.2% rise in net sales per active customer. Active customers at the end of the quarter reached 16.6 million.

Autoship customer sales for the quarter amounted to $1.16 billion, increasing 45.3% year-on-year. Autoship customer sales accounted for nearly 68.3% of the company’s top-line.

Moving on, gross profit increased 59.2% to reach $443.4 million in the reported quarter. Gross margin expanded 190 bps to 25.5% on the back of favorable mix of hardgoods as well as contributions from private label and healthcare. Management pointed out that these upsides drove almost three-quarters of year-over-year improvements in gross margin.

Selling, general & administrative expenses increased 40.3% year-on-year to $343.2 million, while advertising and marketing expenses rose 10.7% to reach $122.4 million. Consequently, operating expenses increased 31% to $465.6 million.

Further, adjusted EBITDA amounted to $15.5 million, improving as much as $44.6 million from the prior-year quarter’s levels. The metric gained from sales growth and gross margin expansion, which helped mitigate residual labor inefficiencies stemming from COVID-19 at the company’s fulfillment centers.

Financial Details

Chewy ended the quarter with cash and cash equivalents of $153.8 million, accounts receivable of $93.7 million and inventories of $453 million. Operating lease liabilities were $261.8 million and total shareholders’ deficit was $377.6 million at the end of the quarter.

In the second quarter, net cash used in operating activities were $28.9 million compared with $21.8 million of net cash provided by operating activities in the year-ago quarter. The negative operating cash resulted out of actions to increase inventory levels for matching current and anticipated demand conditions and to protect customer experience.

Further, negative free cash flow stood at $56 million for the second quarter. Capital expenditures during the quarter were $27.1 million.


The company expects net sales in fiscal third quarter in the range of $1.70-$1.72 billion, which indicates growth in the bracket of 38-40% year on year.

For fiscal 2020, the company expects net sales in the range of $6.775-$6.825 billion that suggests an increase of 40-41% year over year.

Other Updates

Management is impressed with rise in customer acquisition rates along with other metrics such as basket sizes, re-order rates and Autoship sign-up. The company expects to keep gaining from rising online demand for pet products. Industry experts opine that stay-at-home practices amid the coronavirus pandemic have helped boost sales of pet products.

Moreover, this Zacks Rank #2 (Buy) company is expected to keep benefiting from prudent investments in technology, fulfillment centers, distribution network and new business opportunities. The company is on track with expanding product offerings in areas such as prescriptions, hardgoods (fueled by the expansion of private label offerings) and gift cards.

Price Performance

In the past three months, Chewy’s shares have gained 24% compared with the industry’s decline of 5.7%.

Other Key Picks

Grocery Outlet (GO - Free Report) has an expected long-term earnings growth rate of 14.23 and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Newell Brands (NWL - Free Report) has an expected long-term earnings growth rate of 1.7% and a Zacks Rank #2 (Buy).

Ollies Bargain Outlet (OLLI - Free Report) , also a Zacks Rank #2 stock, has a trailing four-quarter earnings surprise of 15.5%, on average.

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