Business context and reporting period
This is Chewy, Inc.’s Form 10-K for fiscal 2020, the 52 weeks ended January 31, 2021—not a 2019 Q4 filing. Chewy is a U.S. online pet-products and healthcare retailer; sales are primarily through its website and apps, with Autoship a major recurring-sales channel.
On February 12, 2021, after year-end, PetSmart distributed its Chewy shares to BC Partners affiliates. PetSmart ceased to own Chewy shares directly or indirectly, although BC Partners affiliates continued to control Chewy.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $7.146 billion | $4.847 billion |
| Gross profit / gross margin | $1.821 billion / 25.5% | $1.144 billion / 23.6% |
| Operating loss | $90.5 million | $252.7 million |
| Net loss / net margin | $92.5 million / (1.3%) | $252.4 million / (5.2%) |
| Adjusted EBITDA / margin | $85.2 million / 1.2% | $(81.0) million / (1.7%) |
| Operating cash flow | $132.8 million | $46.6 million |
| Capital expenditures | $130.7 million | $48.6 million |
| Free cash flow | $2.0 million | $(2.1) million |
| Cash and cash equivalents at year-end | $563.3 million | $212.1 million |
Net sales rose 47.4%, driven by active customers increasing 42.7% to 19.2 million and net sales per active customer rising 3.3% to $372. Autoship customer sales grew 45.4% to $4.889 billion and represented 68.4% of net sales, versus 69.4% in FY2019.
Consumables sales were $4.968 billion (+38.1%); hardgoods were $1.154 billion (+63.6%); and other sales were $1.025 billion (+88.1%). Management attributed gross-margin expansion to improvements across product categories, including growth in proprietary brands, hardgoods and healthcare. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.
Liquidity, debt and material changes
Chewy had no borrowings under its $300 million asset-based revolving credit facility at January 31, 2021. The facility is subject to a borrowing base, covenants and other restrictions. Management said cash and facility availability were expected to cover working capital, capital expenditures and contractual obligations for at least 12 months.
Current assets were $1.227 billion and current liabilities were $1.381 billion. The balance sheet reported $347.4 million of operating lease liabilities; disclosed minimum operating and real-estate lease payments were $770.3 million, including $167.5 million for leases not yet commenced. Capital expenditures increased to $130.7 million, principally for fulfillment capacity, offices and technology. The company raised $318.4 million net in a September 2020 Class A share offering.
SG&A increased 44.1% to $1.398 billion, including higher fulfillment costs, facility and headcount investment, COVID-related incentive pay and sanitation costs, and public-company and technology expenses. Advertising and marketing rose 20.2% to $513.3 million.
Outlook, risks and unusual items
The filing provides no quantified revenue, earnings or cash-flow guidance. Management described continued investment in customer acquisition, technology, fulfillment capacity, proprietary brands and pet healthcare, while targeting operational efficiencies and margin improvement. It cautioned that pandemic-driven customer growth and demand may not persist. COVID-19 increased online order activity during the year, but potential supply, labor, shipping, facility-expansion and cost impacts remained uncertain.
Key risks include intense e-commerce competition; the sustainability of rapid growth and customer-acquisition economics; supplier concentration and availability; shipping and fulfillment capacity; cybersecurity and privacy; product safety and regulatory compliance, including pharmacy and telehealth requirements; and dependence on key employees. The three largest vendors accounted for approximately 32.6% of FY2020 net sales. Legal claims arise in the ordinary course; IBM alleged infringement of four patents, which Chewy disputed. The possible loss in that matter was not estimable. The auditor identified vendor rebates as a critical audit matter because of the complexity and judgment involved in applying vendor-agreement terms and valuing rebates deferred in inventory.
The company reported no income tax provision for FY2020 and maintained a full valuation allowance on net deferred tax assets, citing its loss history. Its dual-class shares carry unequal voting rights; BC Partners affiliates retained control after the PetSmart share distribution. The company does not expect to pay dividends in the foreseeable future.
Investor verification points
- Confirm the reporting period: this 10-K covers FY2020 ended January 31, 2021, not 2019 Q4.
- Assess whether customer growth, demand and improved gross margin can continue after pandemic-related shifts in shopping.
- Track GAAP profitability and cash generation against capital spending; FY2020 free cash flow was only $2.0 million despite positive operating cash flow.
- Review lease commitments, facility expansion needs, revolving-credit borrowing-base availability and covenant requirements.
- Monitor vendor concentration, supply-chain and delivery performance, and the economics of Autoship, healthcare and proprietary brands.
- Check developments in the IBM patent dispute, pharmacy and telehealth regulation, and the consequences of the PetSmart separation and continuing BC Partners control.