Business context and reporting period
Chewy, Inc. operates an online pet-products and healthcare business, including its Autoship subscription program. The filing covers the 13 and 39 weeks ended November 3, 2019, compared with the periods ended October 28, 2018. Although the request metadata says “2018 Q3,” the filing itself is for 2019 Q3.
Financial and operating performance
| Metric | 13 weeks ended Nov. 3, 2019 | 13 weeks ended Oct. 28, 2018 | 39 weeks ended Nov. 3, 2019 | 39 weeks ended Oct. 28, 2018 |
|---|---|---|---|---|
| Net sales | $1,229.8 million | $875.6 million | $3,492.2 million | $2,444.7 million |
| Gross profit / margin | $291.8 million / 23.7% | $172.0 million / 19.6% | $817.9 million / 23.4% | $487.9 million / 20.0% |
| Operating loss | $78.8 million | $78.5 million | $192.1 million | $201.5 million |
| Net loss | $79.0 million | $78.6 million | $191.4 million | $201.5 million |
| Adjusted EBITDA (non-GAAP) | $(30.2) million | $(68.6) million | $(75.2) million | $(173.6) million |
| Operating cash flow | $1.6 million | $(43.2) million | $(27.8) million | $(92.4) million |
| Free cash flow (non-GAAP) | $(12.8) million | $(51.3) million | $(66.3) million | $(128.7) million |
For the quarter, adjusted EBITDA margin improved to (2.5)% from (7.8)%; for the 39-week period it improved to (2.2)% from (7.1)%. Quarterly net loss per share was $(0.20), unchanged year over year; 39-week loss per share was $(0.48), versus $(0.51).
Liquidity, debt and balance sheet
At November 3, 2019, cash and cash equivalents were $135.9 million, versus $88.3 million at February 3, 2019. Current assets were $566.2 million and current liabilities $1,011.4 million, a working-capital deficit of approximately $445.2 million. Total liabilities were $1,248.1 million; stockholders’ deficit was $389.5 million.
Chewy had no borrowings under its $300 million asset-based revolving credit facility; availability is subject to a borrowing base and facility terms. Operating lease liabilities totaled $217.1 million, and the company disclosed approximately $115 million of future payments for leases not yet commenced. Management said cash and expected facility availability should fund working capital and capital expenditures for at least the next 12 months.
Material changes and management commentary
- Quarterly sales rose 40.4%; 39-week sales rose 42.8%. Active customers increased 32.8% to 12.7 million, and net sales per active customer rose 11.4% to $360.
- Autoship customer sales grew 49.2% for the quarter to $865.2 million and represented 70.4% of net sales, compared with 66.2% a year earlier.
- Gross margin expanded 410 basis points in the quarter, which management attributed to improvements across product verticals, including pharmacy and private brands, as well as supply-chain efficiencies and cost reductions.
- SG&A rose 71.9% for the quarter, reflecting fulfillment investment, a new fulfillment center, higher headcount and facilities costs, security and data-protection investment, and $39.3 million of share-based compensation. Advertising expense increased 11.9%, but declined as a share of sales to 9.1% from 11.4%.
- For the 39 weeks, capital expenditures were $38.5 million. The IPO generated approximately $110.3 million of net proceeds; the company also received $14.5 million under its tax-sharing agreement with PetSmart.
Outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management’s liquidity assessment is qualified by risks including growth execution, customer acquisition and retention, competition, supplier and service-provider relationships, fulfillment capacity, cybersecurity, product quality, regulation, and employee retention. The filing says risk factors had not materially changed from the IPO prospectus.
Share-based compensation was $90.4 million for the 39 weeks, versus $10.5 million in the prior-year period, including $80.2 million of RSU expense. Chewy adopted the new lease accounting standard in fiscal 2019 and recognized operating lease right-of-use assets and liabilities. The intercompany loan with PetSmart was terminated without cash repayment, reducing the amount due from Parent by $79.5 million. Certain pharmacy operations remain conducted through a PetSmart subsidiary under a services agreement.
The company reported no litigation expected to have a material adverse effect, no material change in disclosed commitments, and effective disclosure controls as of November 3, 2019.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for Q3 2019, not Q3 2018.
- Review the drivers and durability of sales growth, customer gains, Autoship penetration, and gross-margin expansion.
- Assess the path to profitability and cash generation, including recurring share-based compensation and continued fulfillment and technology investment.
- Evaluate the working-capital deficit, borrowing-base availability under the ABL facility, lease commitments, and planned capital spending.
- Review related-party arrangements with PetSmart, including pharmacy services, tax sharing, guarantees, and the terminated intercompany loan.