Business context and reporting period
Chewy, Inc. operates an e-commerce business selling pet products and services. Despite the request metadata identifying “2020 Q1,” this 10-Q reports the 13 weeks ended May 2, 2021, compared with the 13 weeks ended May 3, 2020.
Financial and operating performance
| Metric | 13 weeks ended May 2, 2021 | Comparable 2020 period |
|---|---|---|
| Net sales | $2.135 billion | $1.621 billion |
| Gross profit / gross margin | $589.8 million / 27.6% | $378.7 million / 23.4% |
| Operating income (loss) | $39.1 million | $(47.5) million |
| Net income (loss) / net margin | $38.7 million / 1.8% | $(47.9) million / (3.0)% |
| Adjusted EBITDA / margin | $77.4 million / 3.6% | $3.4 million / 0.2% |
| Operating cash flow | $98.4 million | $20.7 million |
| Capital expenditures / free cash flow | $38.9 million / $59.5 million | $42.6 million / $(21.8) million |
| Cash and cash equivalents at period end | $637.5 million | $192.5 million at May 3, 2020 |
Net sales rose 31.7%. Active customers increased 31.6% to 19.8 million, and net sales per active customer rose 8.7% to $388. Autoship customer sales grew 34.4% to $1.480 billion, representing 69.3% of net sales, versus 67.9% a year earlier. Sales increased across categories: consumables 24.0%, hardgoods 41.5%, and other 64.2%.
Gross margin expanded 420 basis points. Management attributed the improvement to supply-chain efficiencies and a more favorable mix, including growth in proprietary brands, hardgoods, and healthcare. SG&A increased 26.9% to $406.2 million, principally from fulfillment investments, new facilities, staffing, wages, and IT initiatives; lower share-based compensation partly offset those increases. Advertising and marketing rose 36.1% to $144.4 million.
Balance sheet, debt, and liquidity
At May 2, 2021, total assets were $1.899 billion and total liabilities were $1.830 billion. Current assets were $1.317 billion versus current liabilities of $1.425 billion. Cash increased $74.2 million from January 31, 2021. The company reported no borrowings under its ABL revolving credit facility and $272.8 million of borrowing capacity, subject to its borrowing base. The facility provides up to $300 million and matures in June 2024.
Operating lease liabilities totaled $392.8 million, including $371.5 million classified as non-current; these are lease obligations, not ABL borrowings. Management said cash and available revolving credit were expected to fund working capital, capital expenditures, and contractual obligations for at least the next 12 months.
Material changes, outlook, and risks
The company moved from a year-earlier net loss to net income, while operating cash flow and free cash flow improved. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, share-based compensation; share-based compensation expense was $23.1 million in the quarter. Free cash flow was defined as operating cash flow less capital expenditures.
COVID-19-related shifts toward online shopping contributed to increased sales and order activity. Management said conditions appeared to be improving but that the pandemic’s ultimate effects on consumer behavior, operations, and liquidity remained difficult to predict. The filing provides no numerical revenue, earnings, or margin guidance.
IBM alleges infringement of patents relating to Chewy’s website and mobile application, seeking unspecified damages, potentially trebled damages, injunctive relief, and costs. Chewy denies infringement and intends to defend itself; the possible loss or range of loss was not estimable. The company said other routine legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
PetSmart distributed its Chewy shares in February 2021 and no longer directly or indirectly owned Chewy common stock after the distribution. Some related-party and tax-sharing balances and arrangements remained: Chewy collected $15.0 million under the tax-sharing agreement during the quarter and reported a $24.7 million related receivable. As of June 4, 2021, most PetSmart guarantees had been released, except those relating to two lease agreements.
Other stated risks include sustaining growth, customer acquisition and retention, competition, supplier and logistics capacity, fulfillment expansion, cybersecurity, product quality, regulatory compliance, and attracting and retaining employees. Management reported disclosure controls were effective at a reasonable assurance level as of May 2, 2021 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period: this filing covers Q1 of fiscal 2021, not a quarter ended in calendar 2020.
- Assess whether customer growth, Autoship retention, and higher spending per active customer can persist as pandemic-related shopping patterns change.
- Track gross-margin durability against fulfillment, labor, freight, advertising, and facility costs.
- Review cash-flow quality and working-capital movements; quarterly cash generation can vary with inventory, payables, and other operating balances.
- Monitor lease obligations, available ABL borrowing capacity, and the timing of planned capital investment.
- Follow developments in the IBM patent litigation and any updates to the estimated exposure.
- Consider the recurring nature of share-based compensation when comparing adjusted EBITDA with GAAP earnings.