Pet supply

Will Chewy disappoint investors on Wednesday?

Soft (CHWY 6.15%) has some big questions for investors to answer on June 1. Shares of the online pet supplies company have significantly underperformed the market in recent months, largely on concerns about a slowdown in the e-commerce industry.

Chewy also gave investors reason to worry in its latest earnings report, which showed a drop in customer retention that could portend weaker growth ahead. CEO Sumit Singh and his team will likely discuss this issue, along with rising costs, in the next report.

Let’s take a closer look.

Image source: Getty Images.

About Customer Loyalty…

In March, Chewy reported solid sales growth with revenue up 24% in the year ended Jan. 30. But growth has slowed throughout the year, and this deceleration remains a major concern. Of even greater concern was Chewy’s reduced retention rate. New customer retention in the fourth quarter of fiscal 2020 was “lower than what we typically see,” Singh said at the time, and that churn was the primary factor driving his sales results. weaker.

Management said the low retention was primarily related to unusual shopping behavior related to the early stages of the pandemic. That explanation implies a steady return to more normal churn rates over the next few quarters, and investors will want to see proof of that on Wednesday.

Net losses

Chewy’s slowing growth wasn’t the only factor dragging investor confidence down at the start of 2022. The company also posted a net loss in its latest quarterly report, even as measured by EBITDA. management’s preferred fit.

However, Chewy has been busy raising prices and cutting costs since then, and these moves have given executives confidence that the company can set new records for profitability. Follow the gross profit margin for signs of this rebound. Chewy wants that figure to grow to 28% of sales over time, but he strayed from that goal by the end of 2021.

CHWY Gross Profit Margin Table

Data by Y-Charts.

The bright side

The long-term outlook for Chewy’s business is promising. Pet adoption rates may decline from previous phases of the pandemic. However, spending on pet supplies continues to skyrocket in key markets like the United States and Canada. Chewy’s high proportion of subscription buyers – Autoship sales accounted for nearly 71% of total sales in the last quarter – implies strong commitment and a good chance to grow market share over time .

As long as these subscription metrics remain strong, the company is likely to outperform the broader pet supply market. Of course, the coming quarters will involve more volatility than investors have seen in some time due to the consequences of pandemic-related fluctuations in e-commerce trends. But once the dust settles, Chewy’s efforts to improve margins and gain market share should support strong returns for investors.