Chewy, Inc. — Form 10-K summary
Reporting period: Fiscal year 2019 ended February 2, 2020, and comprised 52 weeks. The filing is an annual report, not a standalone “2018 Q4” filing. Its fourth quarter was 13 weeks; the prior-year fourth quarter was 14 weeks, which limits direct quarterly comparison.
Business context and key financial metrics
Chewy is a U.S. online pet-products retailer offering more than 60,000 products, including food, supplies, medications and private brands. Autoship customer sales represented 69.4% of fiscal-year sales.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $4,846.7 million | $3,532.8 million |
| Gross profit / gross margin | $1,144.1 million / 23.6% | $714.8 million / 20.2% |
| Operating loss | $252.7 million | $267.8 million |
| Net loss | $252.4 million | $267.9 million |
| Adjusted EBITDA / margin (non-GAAP) | $(81.0) million / (1.7)% | $(228.9) million / (6.5)% |
| Cash from operating activities | $46.6 million | $(13.4) million |
| Capital expenditures / free cash flow (non-GAAP) | $48.6 million / $(2.1) million | $44.2 million / $(57.6) million |
For fiscal Q4, net sales were $1,354.5 million, gross profit was $326.2 million, operating loss was $60.6 million and net loss was $60.9 million. The comparable prior-year quarter reported sales of $1,088.2 million and net loss of $66.3 million, but included an extra week.
At February 2, 2020, cash and cash equivalents were $212.1 million and current assets were $629.8 million, versus current liabilities of $1,100.5 million. Total assets were $932.3 million; total liabilities were $1,336.3 million; stockholders’ deficit was $404.0 million. Chewy had no borrowings on its $300 million asset-based revolving credit facility, subject to borrowing-base limits. It said cash and facility availability were expected to fund working capital and capital needs for at least 12 months.
Changes versus the prior period
- Annual sales increased 37.2%; excluding fiscal 2018’s 53rd week, management reported fiscal 2019 sales growth of 40.5%.
- Active customers grew 27.2% to 13.459 million; sales per active customer rose 7.8% to $360. Autoship customer sales increased 44.8% to $3,362.8 million.
- Gross margin expanded 3.4 percentage points, which management attributed to margin improvements across business lines, including pharmacy and private brands, as well as supply-chain efficiencies.
- Net loss narrowed by $15.5 million, while adjusted EBITDA loss narrowed substantially. Fiscal 2019 included $134.9 million of share-based compensation, compared with $14.4 million in fiscal 2018; this was a significant non-cash expense.
- Operating cash flow turned positive, but benefited from working-capital movements, including higher accounts payable and accrued liabilities. Investing cash flow was negative $49.9 million; financing cash flow included $110.3 million of net IPO proceeds.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management described plans to grow existing-customer spending, acquire customers, expand private brands and pet healthcare, and invest in technology and fulfillment capacity, while seeking further margin improvement.
- COVID-19 was identified as a significant uncertainty as of the filing date. Potential effects included supply-chain and shipping disruption, employee availability, fulfillment-center operations and expansion, consumer spending, costs, liquidity and cash flow; the duration and impact were not yet determinable.
- Other material risks include intense price and service competition; reliance on suppliers and third-party delivery, cloud and technology providers; cybersecurity and data privacy; product safety and recalls; and regulatory and pharmacy-licensing requirements.
- PetSmart retained control of voting power through the dual-class share structure, and related-party arrangements and PetSmart-related covenants may affect Chewy’s independence and flexibility. Significant future sales of shares by PetSmart could also affect the stock price.
- Operating leases were recognized on the balance sheet following adoption of ASC 842; reported assets included $179.1 million of lease right-of-use assets and liabilities included $215.9 million of operating lease liabilities. The filing also disclosed approximately $125.0 million of future payments for leases not yet commenced.
- The auditor issued an unmodified opinion on the financial statements, with an emphasis-of-matter paragraph noting that PetSmart acquisition-related accounting and allocated expenses may not reflect standalone results. The filing did not include management’s internal-control assessment or auditor attestation under the newly public company transition period.
Important facts for investors to verify
- How much of sales growth and cash generation is repeatable, considering the prior-year extra week and favorable working-capital contribution?
- Whether gross-margin gains persist while customer acquisition, fulfillment, shipping and share-based compensation costs remain substantial.
- Whether available cash and borrowing-base capacity remain adequate amid fulfillment investment, lease commitments and potential COVID-19 disruption.
- How PetSmart control, related-party agreements, covenants and potential share sales affect governance, operations and public shareholders.
- Whether pharmacy growth, supplier concentration and regulatory, product-safety and cybersecurity exposures develop into material costs or contingencies.