Chewy (CHWY +27%) shares are soaring today, reaching nearly six-month highs. The online pet retailer's impressive Q1 earnings beat and decent sales growth have investors cheering. Despite projecting Q2 revenues below consensus, CHWY reiterated its FY24 outlook, hinting at a stronger second half of the year. The company also announced a new $500 million repurchase program, representing about 5% of its market cap.
- Q1 revenue grew 3.1% year-over-year to $2.88 billion, surpassing the $2.84-2.86 billion outlook. This performance was driven by sustained loyalty in non-discretionary categories (consumables), making up around 85% of total sales, and Autoship customer sales of $2.2 billion, a 6.4% increase year-over-year.
- CHWY observed favorable customer trends, focusing on personalization and enhancing its value proposition, including customer service, quality goods, and quick delivery. These efforts attracted customers from other e-commerce platforms like Amazon (AMZN, Financial) and physical retailers like Walmart (WMT, Financial). Consequently, CHWY saw positive net new and reactivated customer growth compared to the previous year.
- For the first time in two years, new customer acquisition and reactivations exceeded expectations, albeit moderately.
- CHWY launched its paid membership program, Chewy Plus, earlier this month, which could drive further customer growth and generate meaningful cash flows, supporting the $500 million buyback plan.
- Gross margins expanded by 130 basis points year-over-year to 29.7%, driven by momentum in CHWY's sponsored ads business, a shift into healthcare, and a more normalized promotional environment. The sponsored ads business continues to grow, with a long-term target of scaling to around 1-3% of net sales.
- Looking ahead, CHWY expects a minor sequential sales dip in Q2, targeting $2.84-2.86 billion. However, the company reaffirmed its FY25 outlook of $11.6-11.8 billion. Management noted healthy growth rates in pet adoption year-over-year, with a positive balance between adoption and relinquishment for the first time since 2022.
- CHWY is optimistic about the pet industry's globalization, supporting a reacceleration of sales growth, especially as it improves its Canadian business.
The main takeaway from Q1 is that CHWY is amid turnaround dynamics. A key highlight is that the company is not seeing further deterioration in the discretionary environment, which had impacted previous results. Investors are excited about the potential for CHWY shares to reclaim lost ground after hitting all-time lows last month.
