Business context and reporting period
This is Chewy, Inc.’s unaudited Form 10-Q for the 13 and 39 weeks ended November 1, 2020, compared with periods ended November 3, 2019. The request metadata says “2019 Q3,” but the filing is for 2020 Q3; the filing’s comparable period is 2019 Q3. Chewy operates an online pet-products and pet-healthcare business, including its Autoship subscription program. PetSmart controlled the company.
Financial and operating performance
| Metric | 13 weeks ended Nov. 1, 2020 | 13 weeks ended Nov. 3, 2019 | 39 weeks ended Nov. 1, 2020 | 39 weeks ended Nov. 3, 2019 |
|---|---|---|---|---|
| Net sales | $1,782.0 million | $1,229.8 million | $5,103.3 million | $3,492.2 million |
| Gross margin | 25.5% | 23.7% | 24.8% | 23.4% |
| Operating loss | $32.3 million | $78.8 million | $112.1 million | $192.1 million |
| Net loss | $32.8 million | $79.0 million | $113.5 million | $191.4 million |
| Adjusted EBITDA, non-GAAP | $5.5 million | $(30.2) million | $24.4 million | $(75.2) million |
Quarterly net margin improved to (1.8)% from (6.4)%; adjusted EBITDA margin was 0.3% versus (2.5)%. For the 39 weeks, net margin was (2.2)% versus (5.5)%, and adjusted EBITDA margin was 0.5% versus (2.2)%. Quarterly net loss per share was $0.08, compared with $0.20.
Active customers reached 17.8 million, up 39.8% year over year. Net sales per active customer rose 0.8% to $363. Autoship customer sales increased 42.5% to $1,232.7 million in the quarter and represented 69.2% of net sales, versus 70.4% a year earlier.
Cash flow, liquidity and debt
For the 39 weeks, operating cash flow was $55.3 million, versus cash used of $27.8 million; capital expenditures were $100.3 million, leaving free cash flow, a non-GAAP measure, of negative $45.0 million, compared with negative $66.3 million. Quarterly operating cash flow was $63.4 million and quarterly free cash flow was $32.9 million, according to MD&A.
Cash and cash equivalents were $505.8 million at November 1, 2020, up from $212.1 million at February 2, 2020. Current assets were $1,136.5 million and current liabilities $1,318.7 million. Chewy had no borrowings under its $300 million asset-based revolving credit facility. Operating lease liabilities totaled $340.9 million, including current amounts recorded in accrued liabilities. The company said cash and expected facility availability should fund working capital and capital spending for at least 12 months.
Changes, outlook and risks
- Revenue grew 44.9% in the quarter, driven primarily by customer growth and higher order activity. Management said the pandemic accelerated shifts toward online shopping; it had not materially harmed operations to date, but its continuing effects were uncertain.
- Gross margin expanded 180 basis points in the quarter, which management attributed to margin improvement across product verticals, supply-chain efficiencies and sales mix. Hardgoods, healthcare and private brands grew faster than the overall business.
- Fulfillment, facilities and other operating costs increased as Chewy expanded capacity and staffing, opened fulfillment and customer-service facilities, and incurred temporary incentive pay and COVID-related cleaning and sanitation costs. Advertising expense rose in dollars but declined as a share of sales.
- Chewy raised $318.4 million net through a September 2020 Class A share offering. Share-based compensation was $100.2 million for the 39 weeks, including substantial PRSU expense; this is a recurring expense excluded from adjusted EBITDA.
- No quantified financial guidance was provided. Management highlighted uncertainty around COVID-19, consumer demand, supply chain and workforce operations, fulfillment-capacity expansion, growth sustainability, customer acquisition, competition, and vendor relationships. Future receipts under the PetSmart tax-sharing agreement were expected to be insignificant after Chewy’s separation from PetSmart’s consolidated federal tax return.
- The company reported no material change in disclosed risk factors or legal matters, no material change in internal controls, and no material litigation expected to adversely affect the business. Management concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts to verify
- Confirm the intended reporting period: the filing is 2020 Q3, not 2019 Q3.
- Assess whether pandemic-driven customer growth and online demand persist, and whether elevated growth creates ongoing fulfillment, staffing and supply-chain costs.
- Review cash conversion and working-capital needs: inventory increased to $482.6 million, while nine-month free cash flow remained negative after substantial capital spending.
- Consider the effect of continuing share-based compensation and the September equity offering on reported earnings and share count.
- Monitor liquidity, lease commitments, reliance on PetSmart arrangements and the company’s ability to improve GAAP profitability.