After soaring high during the height of the pandemic, the online pet retailer Soft ( CHWY 0.37% ) had a hard time. Down more than 65% from its early 2021 highs, the stock has yet to gain any traction in 2022. Hopes of an uptrend have been further disrupted after the company’s recent results in the fourth quarter and for the 2021 fiscal year, which led to a further decline of 17% the following day.
So was the liquidation of the market justified? There were a few weak points in the most recent results, but there are also reasons for hope. As with many investment decisions, potential shareholders must weigh the good against the bad and determine whether the future will be brighter than the past.
Results may be better than they look
In the fourth quarter of 2021, Chewy reported revenue of $2.4 billion, a 17% year-over-year increase. More concerning for shareholders is that this quarter was a deceleration from the third quarter when revenue was up 24% year over year. However, it should be noted that 2021 had some tough comps as each quarter was compared to 2020 when lockdowns led to increased e-commerce spending.
Autoship sales (where customers have pet products automatically shipped on a set schedule) grew 21% year-over-year to an annual rate of $6.8 billion, or almost total Chewy net sales in 2020. Additionally, active customers increased 7.6% over 2020 and net sales per active customer increased 16%. The fact that spending by existing customers exceeds the addition of new customers suggests that Chewy is proving valuable to pet owners.
Gross margin took a hit year over year, falling from 27% to 25%. Management attributed the margin squeeze to inflation and shipping costs, but noted that price increases implemented in the fourth quarter had yet to be reflected in results. However, even with this decline in margin in the fourth quarter, gross margin for the full year still increased by 120 basis points compared to 2020.
Fiscal 2021 ended with a net loss of $74 million, but this is an improvement from 2020 and 2019, when net loss was $92 million and $252 million. respectively. Free cash flow has also improved over the past three years, from minus $2 million in 2019 to $9 million in 2021. While companies are often judged on a quarter-by-quarter basis, examining these results over the past few years show that a company is taking steps in the right direction. direction.
Reasons to hope
Management certainly tried to stay positive in the shareholder letter that accompanied the results. The company believes gross margin pressures likely peaked in the fourth quarter of 2021 and were already improving in February. Management also cited a shipping contract with fedex this should have a positive impact on gross margins during 2022, even with higher fuel prices.
The gross margin of 26.7% for the year 2021 was a new high for the company, and the long-term gross margin target for the company is between 25% and 28%. If the worst of the margin squeeze is behind Chewy, the next few quarters should show more positive results.
Like any good company, Chewy has big plans for the next few years. Chewy wants to strengthen its leadership position in fresh and prepared pet foods, citing a total addressable market (TAM) of $1 billion that is expected to grow to more than $3 billion. Chewy is also gaining market share in companion animal health, with Chewy Pharmacy sales increasing 75% in the fourth quarter. The company is also getting into the pet insurance business with a soon-to-be-launched suite of pet insurance plans through a partnership with Trupanion.
Finally, 2023 will see the launch of Chewy Loyalty, a customer membership program, as well as sponsored ads on Chewy.com. Both of these initiatives are expected to generate revenue and help make Chewy a one-stop-shop for pet owners around the world.
Result for investors
There’s no denying that the pandemic has accelerated some of Chewy’s financial results, making 2021 year-over-year numbers weak by comparison. But looking back, it’s clear that Chewy is moving towards profitability and generating cash flow, while continuing to add features and products to add value to its customers. With stocks significantly reduced from their recent highs, now may be the perfect time to open a position or add to an existing one.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.