Chewy, Inc. — Form 10-Q Summary
Period and filing-date note: The supplied filing is for the 13 weeks ended May 5, 2019, compared with the 13 weeks ended April 29, 2018—not 2018 Q1 as indicated in the request metadata. The quarter’s results are unaudited. Chewy’s IPO and new credit facility closed after the reporting period.
Business context
Chewy operates an online pet-products business through its website and mobile apps, including its Autoship subscription program. The company reported 11.3 million active customers, served more than 1,600 brands, and offered more than 45,000 products.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,108.9 million | $763.5 million | +45.2% |
| Gross profit / gross margin | $253.9 million / 22.9% | $150.0 million / 19.6% | Margin +3.3 percentage points |
| Operating loss | $(30.3) million | $(59.8) million | Loss narrowed |
| Net loss | $(29.6) million | $(59.8) million | Loss narrowed |
| Adjusted EBITDA and margin | $(15.8) million / (1.4)% | $(51.5) million / (6.7)% | Improved |
| Operating cash flow | $(51.1) million | $(45.3) million | Cash use increased |
| Free cash flow | $(63.4) million | $(58.7) million | Cash use increased |
Cost of goods sold was $855.0 million, or 77.1% of sales, versus 80.4% a year earlier. Management attributed the gross-margin improvement primarily to negotiated reductions from product and freight suppliers. SG&A was $181.9 million (16.4% of sales), up 47.7%; advertising and marketing was $102.3 million (9.2% of sales), up 18.0% but down as a share of sales.
Active customers rose 44.6% to 11.3 million; net sales per active customer increased 9.2% to $343. Autoship customer sales rose 55.8% to $743.9 million and represented 67.1% of net sales, up from 62.5%.
Balance sheet, liquidity and debt
- At May 5, 2019, cash and cash equivalents were $29.3 million, down $59.0 million from February 3, 2019. Current assets were $430.1 million and current liabilities were $828.7 million.
- Total liabilities were $1.04 billion; stockholders’ deficit was $357.9 million. Trade accounts payable was $519.6 million.
- The filing reports no borrowings outstanding at the May 5 quarter-end. On June 18, 2019, Chewy entered a five-year, asset-based revolving credit facility of up to $300 million, subject to a borrowing base; it may request up to $100 million in additional commitments. The facility is secured, includes restrictive covenants, and requires a 1.0:1.0 fixed-charge coverage ratio under specified low-availability conditions.
- Chewy reported $190.9 million of operating lease liabilities at May 5, including $177.6 million classified as non-current. It also had $111.1 million of future payments for signed leases not yet commenced.
- Management stated that cash and expected availability under the new facility would be sufficient for working capital and capital expenditures for at least 12 months. Operating cash use reflected a $41.1 million increase in cash consumed by working capital, driven primarily by inventory, receivables and other assets, partly offset by higher payables.
Material changes, outlook and notable items
- Sales growth reflected a larger customer base and increased spending by active customers. Orders shipped increased 42.1%. Other-category sales rose 179.9%, while consumables rose 43.6% and hardgoods rose 37.1%.
- SG&A growth included $32.5 million of additional fulfillment costs, associated with business growth, a new fulfillment center and customer-service expansion; another $26.2 million reflected corporate expansion, added headcount and public-company preparations. Advertising spend increased $15.6 million.
- Chewy completed its IPO on June 18, 2019, after the quarter. It issued 5.6 million shares at $22 per share and received approximately $111.5 million in net proceeds, intended for working capital and general corporate purposes. PetSmart, the selling stockholder, sold additional shares and received those proceeds.
- At May 5, $74.7 million was due from PetSmart under an intercompany loan. The loan agreement was terminated in connection with the IPO without cash repayment of the outstanding amount. Chewy also reported $10.5 million of pharmacy-related service revenue from PetSmart for the quarter.
- Lease accounting was adopted at the start of fiscal 2019; Chewy recognized operating lease right-of-use assets and liabilities. Management said adoption did not materially affect operating results or cash flows.
- No specific financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results and identified risks including competition, customer acquisition and retention, supplier and service-provider relationships, fulfillment capacity, cybersecurity, product quality, regulation and execution of growth plans.
- The company reported no material change to previously disclosed risk factors or commitments and contingencies, and no litigation it believed would have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level; no material change in internal control was reported.
Investor facts to verify
- Confirm the period: this filing covers Q1 2019, despite the request metadata saying 2018 Q1.
- Assess whether gross-margin gains and improving adjusted EBITDA can continue while the company remains loss-making and cash-flow negative.
- Review working-capital cash needs, the borrowing-base availability and covenants of the post-quarter ABL facility, and the effect of the IPO proceeds.
- Examine the PetSmart relationship, including the non-cash termination of the $74.7 million intercompany loan, pharmacy services revenue, and ongoing guarantees or other related-party arrangements.
- Consider operating lease commitments, including signed leases not yet commenced, alongside fulfillment-center expansion and capital needs.
- Interpret adjusted EBITDA and free cash flow as non-GAAP measures alongside GAAP results; the filing notes their limitations.