Chewy, Inc. — Form 10-Q Summary
Business context and reporting period
Chewy operates an online pet-products and pet-healthcare business, including its Autoship subscription program. This unaudited quarterly report covers the 13 and 26 weeks ended August 2, 2020, compared with the periods ended August 4, 2019. The filing identifies fiscal 2020 as a 52-week year ending January 31, 2021.
Financial and operating highlights
| Metric | 13 weeks ended August 2, 2020 | Prior-year quarter | 26 weeks ended August 2, 2020 | Prior-year half |
|---|---|---|---|---|
| Net sales | $1,699.9 million | $1,153.5 million | $3,321.3 million | $2,262.4 million |
| Gross profit / margin | $433.4 million / 25.5% | $272.2 million / 23.6% | $812.1 million / 24.5% | $526.1 million / 23.3% |
| Operating loss | $32.3 million | $83.1 million | $79.8 million | $113.4 million |
| Net loss / net margin | $32.8 million / (1.9%) | $82.9 million / (7.2%) | $80.7 million / (2.4%) | $112.4 million / (5.0%) |
| Adjusted EBITDA / margin (non-GAAP) | $15.5 million / 0.9% | $(29.2) million / (2.5%) | $18.9 million / 0.6% | $(44.9) million / (2.0%) |
| Operating cash flow | $(28.9) million | $21.8 million | $(8.1) million | $(29.3) million |
| Free cash flow (non-GAAP) | $(56.0) million | $9.9 million | $(77.9) million | $(53.5) million |
Active customers grew 37.9% year over year to 16.6 million; net sales per active customer rose 1.1% to $356. Autoship customer sales increased 45.3% in the quarter to $1.16 billion, equal to 68.3% of net sales, versus 69.3% a year earlier.
At August 2, 2020, cash and cash equivalents were $153.8 million, down $58.2 million from February 2, 2020. Current assets were $733.3 million and current liabilities $1,209.1 million. The company had no borrowings under its $300 million asset-based revolving credit facility. Operating lease liabilities totaled $277.6 million; total liabilities were $1.52 billion. The filing reports a stockholders’ deficit of $377.6 million.
Changes versus prior comparable periods
- Quarterly net sales rose 47.4%; the first-half increase was 46.8%. Management attributed growth chiefly to customer-base expansion, with hardgoods, healthcare and private brands also contributing.
- Gross margin expanded 190 basis points in the quarter and 120 basis points for the first half, which management attributed to supply-chain efficiencies, sales mix and improved margins across product verticals.
- Quarterly net loss narrowed to $32.8 million from $82.9 million. Adjusted EBITDA improved to positive $15.5 million from negative $29.2 million.
- Quarterly selling, general and administrative expense rose 40.3%, including higher fulfillment costs, facility and staffing investments, and COVID-related incentive pay and sanitation costs. Advertising expense rose 10.6% but fell to 7.2% of sales from 9.6%.
- First-half capital expenditures increased to $69.7 million from $24.2 million, primarily for fulfillment, customer-service and technology investments. First-half operating cash use improved year over year, while free cash flow remained substantially negative.
Outlook, risks and unusual items
- Management said cash, cash equivalents and available revolving-credit capacity should fund working-capital and capital-expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- COVID-19 accelerated online shopping and sales, but management said the pandemic’s duration, economic effects and operational or liquidity impacts remain uncertain. The filing cites potential supply-chain, workforce, facility, customer-service and operating disruptions.
- Management reported no material change to the risk factors in the prior annual report and no litigation expected to have a material adverse effect. Disclosure controls were judged effective at a reasonable-assurance level.
- Share-based compensation was $75.4 million for the first half, versus $51.0 million a year earlier; it is excluded from adjusted EBITDA. A tax-sharing agreement with Parent generated $31.0 million due from Parent in the first half. Cash-flow financing included $23.2 million received under that agreement.
- After quarter-end, Chewy finalized agreements for local-government tax benefits tied to up to $70 million of equipment investment for a new fulfillment center. The arrangement involves government-issued bonds and a lease of equipment; the company said it would neither pay nor receive cash for the bonds or equipment conveyance.
Important facts for investors to verify
- Whether customer growth and elevated pandemic-related online demand persist, and how customer spending and retention evolve.
- Whether gross-margin gains and positive adjusted EBITDA can be sustained as fulfillment and other operating costs grow.
- Working-capital requirements, inventory growth and capital spending, and the effect on cash balances and free cash flow.
- The availability of the ABL facility under its borrowing-base conditions, and the company’s substantial current liabilities and lease commitments.
- Parent-related arrangements, including tax-sharing balances, pharmacy services and guarantees, as well as the potential dilution and expense from share-based awards.