Chewy (Nasdaq: CHWY) finished 4% lower following its first-quarter results. The stock sold-off despite the company reporting better than expected results and raising guidance. Over the last two months, Chewy has been one of the biggest winners as it's currently 50% above its pre-coronavirus levels and up more than 100% since the March lows.
Inside the Numbers
The company's growth accelerated due to the coronavirus, as it added 1.6 million new customers. This is a 100% gain from the first quarter of 2019. Over 80% of customers who buy from Chewy become repeat customers due to the convenience, selection, and cost-savings.
One way it does this is through its Autoship program where people can create subscriptions for products that are automatically recurring. This recently crossed the $1 billion mark and accounts for 68% of the company's revenue.
In total, it had 16 million customers in the quarter for total revenue of $1.62 billion which is an increase of 46% and above consensus of $1.53 billion. Despite higher volumes, gross margins also increased to 23.4% from 19.4% last year. The average order size also increased by 11%. The combination of more customers, more transactions, and bigger orders is a constructive development.
The company also increased its projection for 2020 revenue to between $6.55 billion and $6.65 billion. It also expects another strong quarter in the second quarter with revenue of $1.65 billion. Chewy's management is also confident that its first-quarter was not a "one-off" but an inflection point. It remains focused on growth as it lost money in the first quarter and is looking to break-even for the year. One major expense has been upgrading and automating its warehouses which in the long-term will lead to lower freight and shipping costs.
Promising Outlook
In June, Chewy's stock price has been range-bound between $48 and $52. It makes sense as it's digesting a strong move higher. However, the intermediate-term future looks promising, as stocks that beat earnings and raise guidance tend to outperform.
On a longer-term timeline, Chewy is at the intersection of several booming trends. Online sales are growing faster than the overall economy and retail spending, especially among the younger generation. Pet ownership rates are very high among millennials and Generation Z, and they are spending more on their pets. Further, it has an opportunity to sell more higher-priced, high-margin items like medicines and pet insurance to its customers. So far, it's in the early stages of building market share in these segments.