Filing summary
Period clarification: The supplied filing is Chewy, Inc.’s Form 10-Q for the 13 weeks ended August 1, 2021 (fiscal Q2 2021), not 2020 Q2 as indicated in the request metadata. Comparisons below are with the period ended August 2, 2020. Dollar amounts are in U.S. dollars.
Business context and reporting period
Chewy is an online retailer of pet products and healthcare products, including its Autoship subscription program. The filing reports unaudited results for the 13- and 26-week periods ended August 1, 2021. PetSmart no longer directly or indirectly owned Chewy shares following a February 2021 distribution of its shares to BC Partners affiliates.
Financial and operating performance
| Metric | 13 weeks ended Aug. 1, 2021 | 13 weeks ended Aug. 2, 2020 | 26 weeks ended Aug. 1, 2021 | 26 weeks ended Aug. 2, 2020 |
|---|---|---|---|---|
| Net sales | $2,155.0 million | $1,699.9 million | $4,290.2 million | $3,321.3 million |
| Gross profit / margin | $593.5 million / 27.5% | $433.4 million / 25.5% | $1,183.2 million / 27.6% | $812.1 million / 24.5% |
| Operating income (loss) | $(16.2) million | $(32.3) million | $22.9 million | $(79.8) million |
| Net income (loss) / margin | $(16.7) million / (0.8)% | $(32.8) million / (1.9)% | $22.0 million / 0.5% | $(80.7) million / (2.4)% |
| Adjusted EBITDA / margin | $23.3 million / 1.1% | $15.5 million / 0.9% | $100.6 million / 2.3% | $18.9 million / 0.6% |
| Operating cash flow | $85.1 million | $(28.9) million | $183.5 million | $(8.1) million |
| Free cash flow | $60.3 million | $(56.0) million | $119.7 million | $(77.9) million |
For the 26 weeks, capital expenditures were $63.7 million, versus $69.7 million a year earlier. Adjusted EBITDA and free cash flow are non-GAAP measures; the company cautions they should be considered alongside GAAP results and cash-flow measures.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $725.0 million at August 1, 2021, up from $563.3 million at January 31, 2021.
- Current assets were $1,392.5 million and current liabilities were $1,538.9 million, a derived working-capital deficit of approximately $146.4 million.
- There were no borrowings under the asset-based revolving credit facility at quarter-end; reported borrowing capacity was $264.0 million. On August 27, 2021, after quarter-end, Chewy amended the facility, increasing commitments to $500 million, extending maturity to August 2026, and increasing potential incremental facilities to $300 million.
- Total liabilities were $1,943.3 million, including $394.4 million of operating lease liabilities. The filing reports no material finance lease obligations and no outstanding ABL borrowings at quarter-end.
- Management said cash and expected availability under the revolving facility should fund working capital, capital expenditure requirements and contractual obligations for at least the next 12 months.
Material changes and management commentary
- Quarterly sales rose 26.8%; first-half sales rose 29.2%. Management attributed growth to more active customers and higher customer spending. Active customers increased 21.1% year over year to 20.1 million; net sales per active customer rose 13.5% to $404.
- Autoship customer sales increased 30.3% in the quarter to $1,513.9 million and represented 70.3% of net sales, up from 68.3% a year earlier.
- Gross margin expanded by 200 basis points in the quarter and 310 basis points for the first half. Management cited supply-chain efficiencies, sales mix, and margin expansion across consumables, hardgoods and healthcare.
- Quarterly operating expenses grew 30.9%, faster than sales, driven by fulfillment-center and customer-service investments, wages and benefits, headcount, IT initiatives, and increased marketing. Advertising and marketing expense rose 40.4% in the quarter.
- First-half operating cash flow improved substantially year over year, with management citing working-capital cash inflows, including lower inventories and higher payables and other current liabilities. Cash from financing included $42.4 million received under tax-sharing arrangements.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management said quarterly results are not necessarily indicative of full-year results.
- Management said the COVID-19 pandemic had not materially adversely affected operations to date, but its future effects remained difficult to predict. It cited continued tight labor markets, particularly at fulfillment centers, and potential impacts on supply chains, staffing, operations and consumer spending.
- Other identified risks include sustaining growth and acquiring customers cost-effectively; competition; supplier and third-party relationships; fulfillment capacity expansion; cybersecurity; product quality; regulation; and employee retention.
- IBM alleges infringement of four patents and added a fifth patent assertion. Chewy denies infringement and intends to defend itself; its motion to dismiss claims relating to four patents was denied August 4, 2021. The potential loss or range of loss was not estimable.
- The company maintained a full valuation allowance on net deferred tax assets and recorded no income tax provision for the periods presented. Share-based compensation was $21.8 million in the quarter and $44.9 million for the first half.
Most important facts for investors to verify
- Confirm the fiscal-period comparison: this filing covers Q2 2021, not Q2 2020.
- Track whether gross-margin expansion and positive first-half operating income persist as fulfillment, wage and marketing costs rise.
- Assess the quality and repeatability of cash generation, including working-capital movements and tax-sharing receipts.
- Review the August 27 ABL amendment and actual borrowing-base availability, rather than assuming the full facility commitment is drawable.
- Monitor customer growth, spending per active customer, Autoship mix, and the IBM patent litigation as it develops.