Chewy, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 3, 2020, compared with the 13 weeks ended May 5, 2019. This does not match the request metadata of “2019 Q1.” Amounts below are in U.S. dollars.
Business context and key financial results
Chewy operates an online pet-products and pet-healthcare business, including its Autoship subscription program. Management said COVID-19 drove early stock-up demand and later shifted more consumer spending online.
| Metric | 13 weeks ended May 3, 2020 | Comparable 2019 period | Change |
|---|---|---|---|
| Net sales | $1.621 billion | $1.109 billion | +46.2% |
| Gross profit / gross margin | $378.7 million / 23.4% | $253.9 million / 22.9% | Margin +0.5 percentage points |
| Operating loss | $47.5 million | $30.3 million | Loss widened |
| Net loss / net margin | $47.9 million / (3.0%) | $29.6 million / (2.7%) | Loss widened |
| Adjusted EBITDA / margin | $3.4 million / 0.2% | $(15.8) million / (1.4%) | Improved |
| Operating cash flow | $20.7 million | $(51.1) million | Turned positive |
| Capital expenditures / free cash flow | $42.6 million / $(21.8) million | $12.2 million / $(63.4) million | Free cash flow improved |
Active customers increased 32.6% to 15.0 million; net sales per active customer rose 4.1% to $357. Autoship customer sales grew 48.0% to $1.101 billion and represented 67.9% of net sales, versus 67.1%.
Liquidity, debt, and balance sheet
Cash and cash equivalents were $192.5 million at May 3, 2020, down $19.6 million from February 2, 2020. The company had no borrowings under its $300 million asset-based revolving credit facility; availability is subject to a borrowing base, and the facility permits requests for up to $100 million in additional commitments, subject to conditions.
Current assets were $767.8 million and current liabilities were $1.250 billion. Total liabilities were $1.520 billion, including $244.9 million of operating lease liabilities; stockholders’ deficit was $396.5 million. Trade payables rose to $782.9 million from $683.0 million, while inventory rose to $448.8 million from $317.8 million.
Material changes, outlook, and risks
- Sales growth reflected a larger customer base and higher spending per active customer. Management cited a meaningful increase in organic customer growth during the COVID-19 period.
- Gross margin improved with margin expansion across business lines, including pharmacy and private brands, and supply-chain efficiencies. Cost of goods sold also included incremental COVID-19 costs.
- Selling, general and administrative expenses increased 76.0% to $320.1 million, driven by higher fulfillment costs, new fulfillment facilities, staffing, temporary incentive pay, COVID-related sanitation, corporate expansion, public-company costs, and share-based compensation. Share-based compensation expense rose to $42.2 million from $7.2 million.
- Operating cash flow turned positive, but benefited from working-capital timing, including higher current liabilities from the timing of inventory payments. Capital expenditures increased substantially to support fulfillment capacity and IT investment.
- Management said cash and cash equivalents plus revolving-facility availability should fund working capital and capital expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management could not predict the duration or severity of COVID-19 effects on operations, liquidity, supply chain, workforce, or consumer demand.
- The filing reported no material changes to previously disclosed risk factors or legal matters and no litigation believed likely to have a material adverse effect. Management concluded disclosure controls were effective at a reasonable-assurance level.
Unusual and related-party items: A $12.8 million amount was recorded due from PetSmart under the tax-sharing agreement. PetSmart also provides guarantees for certain leases and supplier credit-insurance obligations. After quarter-end, on May 8, a PetSmart subsidiary converted 17.6 million Class B shares into Class A shares and entered a variable forward purchase agreement referencing up to that number of shares.
Important facts for investors to verify
- Confirm the period intended: this is a quarter ended May 3, 2020, not a 2019 first-quarter filing.
- Assess the sustainability of COVID-era customer and sales growth, including retention and Autoship trends.
- Evaluate the drivers and recurring nature of the GAAP loss, adjusted EBITDA improvement, and unusually high share-based compensation.
- Review working-capital quality and the extent to which positive operating cash flow depended on payment timing, alongside higher inventory and capital spending.
- Check current liquidity and borrowing-base availability under the ABL facility, and monitor lease commitments and obligations involving PetSmart.
- Consider the potential effects of COVID-19 on fulfillment capacity, costs, suppliers, employees, and future demand; the filing gives no quantified outlook.