Chewy, Inc. — Q3 FY2023 Form 10-Q
Reporting period: 13 weeks ended October 29, 2023; year-to-date figures cover 39 weeks. Chewy is an e-commerce retailer of pet products and services. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $2.739B | $2.532B | $8.301B | $7.391B |
| Gross profit / margin | $780.8M / 28.5% | $720.2M / 28.4% | $2.359B / 28.4% | $2.071B / 28.0% |
| Operating income (loss) | ($10.2M) | ($0.4M) | ($4.0M) | $40.0M |
| Net income (loss) / margin | ($35.8M) / (1.3%) | $2.3M / 0.1% | $5.3M / 0.1% | $43.1M / 0.6% |
| Adjusted EBITDA / margin | $82.1M / 3.0% | $70.4M / 2.8% | $279.2M / 3.4% | $214.0M / 2.9% |
| Operating cash flow | $80.2M | $117.4M | $387.4M | $249.0M |
| Free cash flow | $48.5M | $69.8M | $276.5M | $77.2M |
- Q3 net sales increased 8.2%; year-to-date sales rose 12.3%. Consumables grew 10.0% in Q3, while hardgoods declined 2.2%.
- Active customers were 20.266 million, down 1.3% year over year. Net sales per active customer increased 13.8% to $543. Autoship customer sales grew 12.8% to $2.093B and represented 76.4% of sales, compared with 73.3% a year earlier.
- Q3 operating expenses rose 9.8% to $790.9M, outpacing gross profit growth. SG&A increased 12.5%, including higher facilities, fulfillment, and share-based compensation costs; advertising and marketing increased 1.2%.
- Q3 net loss included $34.1M of other expense, chiefly a $33.8M fair-value loss on equity warrants. Higher interest income partly offset the impact. Adjusted net income was $63.0M, versus $48.4M a year earlier; this non-GAAP measure excludes specified items including share-based compensation, warrant fair-value changes, and exit costs.
- For the first 39 weeks, operating cash flow increased to $387.4M, while capital expenditures fell to $110.9M from $171.8M. Free cash flow is a non-GAAP measure and may vary with capital spending and working capital.
Liquidity, debt, and balance sheet
- At October 29, cash and cash equivalents were $469.4M and marketable securities were $487.8M, together totaling $957.2M. Current assets were $1.883B and current liabilities were $1.965B.
- There were no borrowings under the $800M ABL revolving facility; available borrowing capacity was $759.0M. The facility matures August 2026. Operating lease liabilities totaled $555.4M; finance leases were not material.
- Management said cash, marketable securities, and available facility capacity should fund working capital, capital expenditures, and contractual obligations for at least the next 12 months.
Material changes, outlook, and risks
- Post-period transaction: On October 30, affiliates of BC Partners transferred $1.9B to Chewy to fund certain affiliate tax obligations inherited through the transactions and transaction expenses. The amount is not reflected in the October 29 balance sheet. Chewy said the related tax obligation estimate was unavailable; the merger agreement provides for BC Partners affiliates to indemnify Chewy for certain tax liabilities. Chewy Pharmacy KY became an indirect wholly owned subsidiary, and related services and tax-sharing agreements were terminated.
- The amended investor rights agreement provides for gradual conversion of Class B shares, which carry ten votes per share, into Class A shares, which carry one vote per share, as well as changes to director nomination rights and other governance provisions.
- No quantified company guidance is provided in the filing. Management cited inflation, higher interest rates, and changing consumer behavior as continuing uncertainties, and said it is adapting logistics, supply chain, and purchasing processes.
- IBM patent litigation remains unresolved: an appeal is pending, and IBM has renewed an allegation concerning a patent reexamined by the U.S. Patent and Trademark Office. Chewy denies infringement and intends to defend itself. The company said it did not expect current legal matters to have a material adverse effect, while noting outcomes are uncertain.
- The filing reported no material changes to the previously disclosed risk factors or market-risk disclosures. Disclosure controls were considered effective at a reasonable assurance level.
Important facts for investors to verify
- How the $1.9B post-quarter transfer is accounted for, the eventual amount of related tax obligations, and the scope of BC Partners’ indemnity.
- Whether sales growth and higher spending per active customer can persist while active-customer counts are declining.
- Underlying profitability and cash generation after recurring share-based compensation, warrant valuation changes, and capital expenditure needs.
- Developments in the IBM litigation and the financial or operational implications of the governance and ownership restructuring.