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Chewy (CHWY)

Early last month we published a stock report on Freshpet, the pet food company specialising in fresh, refrigerated food for cats and dogs. It’s a simple idea that has been gaining momentum for a few years now and Freshpet are undoubtedly in the box seat to attain the biggest slice of the pie. A recent pullback in that stock has made it an even greater buy today. You can read about Freshpet here: https://capital19.com/investing-in-us-stocks/freshpet-frpt/. But today’s report is actually about a competitor that has just fallen into a great buying range.

As we discussed in that article, the covid pandemic brought with it an increasing demand for pet ownership. We wrote ” Pet stores quickly ran out of stock, as did animal shelters, pet rescue centres and private breeders. All claim that the surge in demand was off the charts. It was something the industry had never seen before. At the society for the Prevention of Cruelty to Animals in LA, for example, the number of adoptions had doubled by June and a waiting list was set up to accommodate those that missed out.”

“The same thing has been happening in Australia too. According to the RSPCA, dogs are being adopted out faster than they are being brought in. And the waitlist for a new puppy can be upwards of three years. It’s a global phenomenon that has continued into 2021 as the pandemic worsened across the US and Europe in particular. More people stuck at homes and more people after home companions.”

Another phenomenon that we have discussed countless times during the pandemic, is that shoppers have been moving on mass to purchase products online. In 2020 three out of four consumers tried online shopping for the first time, with more than half of these claiming they will continue to do so after the pandemic is over. The global shutdowns have brought forward the use of the online marketplace like no other business. It was going to happen eventually anyway, 2020 just sped things up a bit.

Chewy, today’s stock report subject, benefits form both of these societal changes. It sells pet foods online, making the purchasing of pet food easier for owners. I loved the stock at the time we decided to put out FreshPet however the valuation was just a little too high. I made a note to keep an eye on it though. In case we saw a decent enough pullback to make it a worthwhile purchase. And the recent move out of the pandemic stocks and the technology industry has provided us with a perfect opportunity.

The innovation behind Chewy is how simple it makes the buying process. It’s “Autoship” programme lets customers set up automated delivery of pet food at a schedule of their choosing. It’s basically a set and forget system for buying pet food. No more running out of food, never having to go to the shops and heave a 10kg bag of food back to your car. It’s a convenience that many are unlikely to want to give up once life goes back to normal.

They offer a large discount on the first purchase to entice new business and then a smaller discount for each ongoing purchase. It’s effectively a subscription service. And you know how much we love those. It’s guaranteed ongoing income that will continue as long as you provide a good service. Sticky money it’s called. 69% of Chewy’s sales are through its Autoship programme, and the company is looking to make this percentage even higher.

Sales have not surprisingly been skyrocketing. In its latest earnings report sales were up 45% year on year to $1.78 billion. It was up 47% the quarter before that, and 46% before that. Active customers increased by 40% in the quarter, with Autoship sales rising by 43%. The bears out there are expecting this to slow – hence the recent selloff. They believe that as shops open up customers will go back to buying their pet foods in supermarkets. And there is no doubt that there will be some churn amongst current users. However, we think that Chewy will be able to keep more of its business than the bears think.

Customers have had a taste of how easy it is to purchase their food in this way and Chewy are getting better at attracting and keeping new clients. In the last quarter they saw more online traffic to their website, more conversions from these visitors into customers than in any other quarter, and the highest user retention it had ever seen. The amount of total active customers has increased by almost 40% in the last year. They’ve been spending a lot of cash in shoring up their delivery services after the boom of 2020 and this is looking like it is starting to pay dividends in retaining new clients. If the trend continues it will see Chewy catch up to its valuation before you know it.

Chewy reports earnings on Tuesday the 30th of March and it will be an important moment. They’ll be looking to see revenue around the $1.95 billion mark, which will be another year on year increase of 45%. They’ll be looking for a loss per share of $0.10c which will be a 33% rise on the same quarter a year ago. A slight beat or even optimistic guidance could see the shares back in the triple digits – a 20% gain at the current price. Missing the mark will see prices fall and the stock become an even better buying opportunity. We’ll find out all on Tuesday.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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