Chewy, Inc. quarterly report, Q2 FY2019

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Chewy, Inc. Form 10-Q Summary

Period: The filing covers the 13 and 26 weeks ended August 4, 2019, compared with periods ended July 29, 2018. Although the request metadata says 2018 Q2, the filing itself is for fiscal 2019 Q2.

Business context and reporting period

Chewy operates an online pet-products and pet-health business, including its Autoship subscription program. It reported 12.0 million active customers and described a broad assortment of more than 45,000 products. Chewy completed its IPO on June 18, 2019.

Financial and operating performance

  • Q2 net sales: $1.154 billion, up 43.2% year over year. For the first half, sales were $2.262 billion, up 44.2%.
  • Q2 gross profit and margin: $272.2 million and 23.6%, versus $165.9 million and 20.6% a year earlier. First-half gross margin was 23.3%, up from 20.1%.
  • Q2 operating loss: $83.1 million, versus $63.1 million; operating margin improved to negative 7.2% from negative 7.8%. Q2 net loss was $82.9 million, versus $63.1 million. First-half net loss was $112.4 million, versus $122.9 million.
  • Adjusted EBITDA: Q2 loss of $29.2 million, compared with $53.4 million; margin was negative 2.5% versus negative 6.6%. First-half adjusted EBITDA loss was $44.9 million, versus $104.9 million. These are non-GAAP measures.
  • Customer and recurring-sales metrics: Active customers increased 39% to 12.0 million; net sales per active customer rose 10% to $352. Autoship customer sales grew 48.5% in Q2 to $799.6 million and represented 69.3% of sales, up from 66.8%.
  • Cash flow: Q2 operating cash flow was positive $21.8 million versus negative $3.9 million, according to the filing’s operating metrics. For the first half, operating cash flow was negative $29.3 million versus negative $49.2 million; free cash flow was negative $53.5 million versus negative $77.4 million.
  • Liquidity and obligations: Cash was $150.8 million at August 4, up from $88.3 million at February 3. Current assets were $531.0 million and current liabilities $938.9 million. The company reported a $361.7 million stockholders’ deficit.
  • Debt and leases: No borrowings were outstanding under the new $300 million asset-based revolving credit facility. Operating lease liabilities totaled $216.7 million; Chewy also disclosed approximately $56 million of future payments for leases not yet commenced.

Material changes versus the prior comparable period

  • Sales growth reflected a larger customer base and higher spending per active customer. Consumables sales increased 39.4% in Q2; hardgoods rose 35.4% and other sales rose 247.3%.
  • Gross margin improved, which management attributed primarily to operating efficiencies and cost-reduction initiatives; cost of goods sold grew more slowly than orders shipped.
  • Q2 SG&A increased 75.0% to $244.6 million, outpacing sales growth. Management cited higher fulfillment and customer-service costs, corporate expansion and headcount, and $39.7 million of additional non-cash share-based compensation.
  • Advertising expense increased 24.1%, but fell to 9.6% of sales from 11.1%. The IPO provided approximately $110.6 million in net proceeds. The new lease accounting standard added right-of-use assets and lease liabilities to the balance sheet.

Outlook, risks, contingencies, and unusual items

  • No specific revenue, earnings, or cash-flow guidance is provided. Management said cash and expected availability under the revolving facility should fund working capital and capital expenditures for at least the next 12 months, while noting that this assessment depends on current information and circumstances.
  • Management highlighted risks including competition, customer acquisition and retention, forecasting demand, supplier and service-provider relationships, fulfillment capacity, cybersecurity, product safety, regulation, and attracting and retaining employees. The filing says risk factors had not materially changed from the IPO prospectus.
  • The credit facility is secured by substantially all company and domestic-subsidiary assets, includes restrictive covenants, and may require a minimum fixed-charge coverage ratio if excess availability falls below specified thresholds.
  • Q2 results include $43.8 million of share-based compensation expense. The company also reported a $79.5 million reduction in amounts due from Parent when its intercompany loan was terminated without cash repayment. Pharmacy services provided through a PetSmart subsidiary generated $10.9 million of Q2 net sales under a related-party services arrangement.
  • Chewy reported no litigation that it believed would have a material adverse effect and no material changes to previously disclosed commitments. Disclosure controls were judged effective at a reasonable assurance level.

Important facts for investors to verify

  • Confirm the reporting period: this filing is for 2019 Q2, not 2018 Q2.
  • Assess whether gross-margin gains and improving adjusted EBITDA can continue while the company remains loss-making and invests in fulfillment and customer support.
  • Review cash conversion, inventory and payable trends, and the gap between current assets and current liabilities.
  • Evaluate the impact of recurring share-based compensation, lease commitments, and the secured facility’s borrowing-base and covenant terms.
  • Review the governance implications of Class B shares carrying ten votes per share and the company’s continuing arrangements with PetSmart.