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Chewy Idea Proposal (CHWY)

Chewy Idea Proposal (CHWY)
 

Will Chewy’s push into private label and pharmacy pet medication lead to increased sales and margins?

Report Available: March 19, 2020

 

Blueshift’s initial research showed CHWY continuing its strong growth after its June 2019 IPO and a focus on margin expansion through private label foods and pet medication sales. But there are questions as to the relative impact of private label sales and the challenge the company faces in ramping up its pet medication business.

 

Observations

  1. CHWY’s Q3 missed earnings expectations but beat revenue with year-to-year growth up 40%. The company posted a narrower loss than expected and gross margin improved to 23.7% of sales. Active customers grew 33% to nearly 13 million while net sales per active customer climbed 11%. CHWY has expanded SKUs 25% compared to a year ago. The company was also buoyed when the expiration of its IPO lockup period did not result in a rush to sell shares. CHWY raised guidance for FY 2019, expecting 40% growth for the year, indicative of its confidence in a strong fourth quarter.
  2. CHWY accounts for 55% of online pet food sales and pet food accounts for about 80% of CHWY sales. The company offers free shipping when customers spend $50 or more on an order. Its core customer buys pet food once a month to get the free shipping, often setting up their order using the autoship feature to replenish their consumable supply, with autoship now representing over 70% of sales.
  3. In order to boost margin, CHWY is focused on adding and increasing private label food and pet pharmacy sales. CHWY’s private label brand offerings grew 80% in the last year. Sales of these products grew more than 60% in the third quarter and account for double-digit share of sales in several food categories. CHWY’s pharma pet medication offering is the fastest growing segment in the company. Gross margin improved more than 650 basis points year to year and better logistics in the Phoenix operations center will help serve West Coast customers.
  4. CHWY will have to fight off AMZN which has twice the number of pet products. AMZN also has a subscribe and save option similar to autoship which includes discounted prices. Price comparisons show the two are generally even. Still, CHWY does come out first in some head-to-head comparisons of traditional dog food delivery options. While private label is expected to give CHWY more lower-priced options for its customers and a boost to the company’s margins, it is still a question of how much this can move the needle for the company when private label represents a small percentage of overall food sales.
  5. The pet medication supplies and medicine business is an $18 billion market, but only $5 billion of that is pet medication, with half of that business going to veterinarians, making the TAM for CHWY smaller than some believe. CHWY is seeing a challenge from WMT which is opening 100 vet clinics in its stores as well as an online pharmacy which will deliver pet medications to customers’ homes and businesses. And veterinary offices are not giving up their business easily, partnering with companies like Covetrus and Vet Source to essentially serve as their online pharmacies. Analysts say the pet medication business is not going to be as easy for these online retailers as they think given the need for a prescription from a vet and clinics’ preference to fill those prescriptions themselves. PETS’ new supply contracts with animal drug  manufacturers are helping to ease the price war. Online retailers must abide by minimal advertised pricing agreed upon with manufacturers or they will face penalties if they offer prices cheaper than the agreed upon rate, leveling the playing field across the industry and making it more difficult for CHWY to gain an advantage.

 

Has CHWY reached a point of saturation? How many more new customers can it attract? What will CHWY’s growth rate look like? What percent of the pet food market that has not yet shifted online is likely to do so? What kind of pet households are ordering pet food on CHWY? How are frequency and dollar amount of orders? What developments are happening with private label pet food at CHWY? How is this affecting sales and margins? How big can pet medication grow as a percent of CHWY’s business? How big will the shift away from vets to CHWY be? How much of the pet medication market will only be provided by vets and not be sold OTC? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Pet food manufacturers, Supply chain, Veterinary practices, and Industry specialists.  

 

 

Companies: Chewy Inc. (CHWY), PetMed Express Inc. (PETS), Amazon.com Inc. (AMZN), Walmart Inc. (WMT)

 

Research Begins: March 2, 2020

 

 

To see other ideas Blueshift Research is currently working on, please click here.

 

 

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