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Chewy's First Public Report Was Pretty Good — but Still Not Good Enough

Shares of pet-centric online retailer Chewy (NYSE: CHWY) jumped by as much as 88% on the day it went public in June, but not long after, they went into a decline. The company's fiscal first-quarter report, released Thursday, did little to change that trend, and for good reason. Chewy is growing, but its gross profit margins are slim, and its bottom-line losses are still steep.

The good news

Chewy, which is still majority owned by PetSmart, has been growing fast. E-commerce spending keeps rising, as does "pet parent" spending on our animal companions -- a dual tailwind that has helped the company. Its double-digit pace of expansion continued in its fiscal Q1, which ended May 5.


Fiscal Q1 2019

Fiscal Q1 2018



$1.11 billion

$763 million


Net income (loss)

($29.6 million)

($59.8 million)


Adjusted EBITDA

($15.8 million)

($51.5 million)


EBITDA = earnings before interest, tax, depreciation, and amortization. Fiscal Q1 2018 ended April 29. Data source: Chewy.

It's easy to understand why the stock raced higher when it initially debuted. Its 45% revenue growth was driven by an active customer base that grew 3.5 million year over year to 11.3 million, and sales per customer grew 9%. Purchases made through Autoship -- which allows customers to schedule regularly recurring shipments of pet food and other items -- made up 67% of revenues.

The outlook for the rest of fiscal 2019 remains rosy: Management is forecasting 32% to 34% annualized growth, and adjusted EBITDA margin is expected to improve by 4 to 4.5 percentage points. Not too shabby.

Image source: Getty Images.

And the bad news

Chewy remains solidly in double-digit growth territory, but its trajectory may be losing steam far sooner than some investors may have been expecting. That could be a problem given how far from profitability the company is, gross profit on product sold is still pretty thin, and the valuation on the stock is on the high side.


Fiscal Q1 2019

Fiscal Q1 2018


Gross profit margin



3.3 pp

Net income (loss) margin



5.1 pp

Adjusted EBITDA margin



5.3 pp

Pp = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. Fiscal Q1 2018 ended April 29. Data source: Chewy.

Granted, Chewy made solid progress on the bottom line as it grew over the past year. However, as its revenue growth moderates, so will its adjusted profit margin growth. The 4.0 to 4.5 percentage point expected adjusted EBITDA improvement for full-year 2019 is far lower than the 5.3 percentage point improvement in Q1. That means unadjusted profitability could still be a ways off.

Given the ample amount of red ink, it's difficult to properly value Chewy as a business. Investors are left with the imperfect price-to-sales ratio metric (market cap divided by the last 12 month's revenues). Chewy currently trades for 3.5 times the last year's-worth of sales. That's lower than Amazon's (NASDAQ: AMZN) 4.0 ratio, but Chewy is no Amazon -- it has no high-flying cloud computing powerhouse operating adjacent to its e-commerce unit, creating massive, high-profit-margin revenues.

If Chewy can maintain its strong double-digit growth clip, its valuation will become more reasonable; and it appears the company is on track to turn a profit at some point, perhaps in 2020 if current trends hold. But the stock got far ahead of itself when it debuted, and results will need to be much better next time around to lift share prices out of their post-IPO rut. So it still might not yet be time to jump aboard the Chewy train.

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