Chewy, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for the 52-week fiscal year ended January 29, 2023, compared with the 52-week fiscal year ended January 30, 2022. It is not a filing for 2021 Q4.
Business context
Chewy operates a U.S. online pet-products and pet-healthcare business through its website and mobile apps. It reported more than 110,000 product and service offerings, over 3,500 partner brands, and 17 fulfillment centers. Autoship customer sales represented 73.0% of net sales. Chewy acquired veterinary technology provider Petabyte in November 2022.
Financial and operating results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $10.10 billion | $8.89 billion |
| Gross profit / gross margin | $2.83 billion / 28.0% | $2.37 billion / 26.7% |
| Operating income (loss) | $55.8 million | $(72.2) million |
| Net income (loss) | $49.2 million | $(73.8) million |
| Net margin | 0.5% | (0.8)% |
| Adjusted EBITDA and margin (non-GAAP) | $305.9 million / 3.0% | $78.6 million / 0.9% |
| Operating cash flow | $349.6 million | $191.7 million |
| Capital expenditures | $230.3 million | $183.2 million |
| Free cash flow (non-GAAP) | $119.3 million | $8.6 million |
Net sales rose 13.6%, while gross profit increased 19.3%. Consumables sales grew 17.1% and “Other” sales grew 17.2%; hardgoods sales fell 6.9%. Net sales per active customer increased 15.1% to $495, but active customers declined 1.2% to 20.4 million. Orders shipped increased 4.2%. Autoship customer sales rose 18.0% to $7.37 billion.
Cash and cash equivalents were $330.4 million and marketable securities were $346.9 million at year-end. The amended ABL revolving facility provides up to $800 million, subject to its borrowing base; available borrowing capacity was $749.9 million, with no borrowings outstanding. Current liabilities exceeded current assets by approximately $249 million. The company reported $499.4 million of operating lease liabilities on its balance sheet and $877.5 million of legally binding minimum lease payments in its contractual-obligations discussion.
Changes, outlook and notable items
- Chewy moved from a GAAP net loss to net income and materially improved operating cash flow and free cash flow year over year. Management attributed margin gains to pricing, sales mix, and supply-chain efficiencies.
- SG&A increased 16.4%, including higher facilities and general costs, fulfillment investment, and share-based compensation. Share-based compensation expense was $158.1 million, compared with $77.8 million in FY2021.
- Investing cash outflow increased to $615.5 million, including $343.8 million of net purchases of marketable securities, $230.3 million of capital expenditures, and approximately $40.0 million paid for acquisitions.
- Petabyte’s estimated purchase price was $43.3 million; the preliminary allocation included $39.4 million of goodwill. The filing says the acquisition’s pro forma impact was not material.
- Other expense was $13.2 million, primarily reflecting a change in the fair value of equity warrants. The valuation depends partly on significant unobservable assumptions.
- No specific FY2023 revenue or earnings guidance is provided. Management expects cash, marketable securities, and facility availability to fund working capital, capital expenditures, and contractual obligations for at least the next 12 months. It says it will continue investing in technology, automation, fulfillment, customer acquisition, and healthcare offerings.
- Key risks include inflation and consumer spending, competition and customer acquisition costs, labor and shipping constraints, supplier concentration, cybersecurity and third-party technology dependence, and regulatory requirements for pharmacy, telehealth, and pet insurance. Three largest vendors’ products represented approximately 36% of FY2022 net sales.
- IBM’s patent case remained on appeal after the district court ruled for Chewy on three patents and found a fourth invalid. Management said it intended to defend the case and did not expect the resolution of current legal matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Vendor rebates were identified as a critical audit matter because of the volume and complexity of agreements and the estimation of rebates deferred in inventory.
Important facts for investors to verify
- Whether the increase in spending per customer can continue and active-customer declines reverse.
- Whether gross-margin improvement and positive GAAP profitability persist, considering recurring share-based compensation and the company’s low 0.5% net margin.
- How much of operating cash flow and free cash flow is sustainable after working-capital movements and planned capital spending.
- Liquidity needs and lease commitments alongside the negative working-capital position; the ABL’s availability is subject to borrowing-base and covenant terms.
- Progress and economics of Petabyte, CarePlus, and other healthcare initiatives, including regulatory and execution risks.
- The final purchase-price allocation for Petabyte, the assumptions underlying equity-warrant valuations, and developments in the IBM appeal.