September 25, 2020

The pet business is ‘recession resilient’: Chewy CEO Sumit Singh

Chewy’s second quarter earnings prove at least two things. One, pet parents are showing their furry (and not so furry) home companions much love during the COVID-19 pandemic. And two, that the business of pets — per a long-held thesis — holds up well during recessions.

“The category is definitely recession resilient. And the data sort of suggests and proves that out,” Chewy CEO Sumit Singh told Yahoo Finance’s The First Trade.

Indeed it does.

Nielsen data shows that pet food and supplies sales rose 26% in stores and 77% online at the height of the pandemic in March as pet owners stocked up on goods. While sales at stores have tapered off as people avoid crowds, e-commerce has stayed generally solid as pantries are restocked after the initial buying binge.

The sales strength in pet products is seen in online player Chewy’s latest quarter, too.

  • Net Sales: sales up 47% year-over-year to $1.7 billion versus estimates for $1.64 billion

  • Active Customers: up 37.9% year-over-year to 16.6 million versus estimates for 15.8 million

  • Gross Profit Margin: 25.5% (23.6% a year ago) versus estimates for 24.1%

  • Adjusted EBITDA: $15.5 million (loss of $29.2 million last year) versus estimates for a loss of $12.4 million

  • Non-GAAP EPS: loss of 8 cents (loss of 21 cents last year) versus estimates for a loss of 13 cents

Shares of Chewy (CHWY) dropped nearly 8% in Friday trading following the quarterly results. The stock had run up about 218% from its late March lows ahead of the earnings results, so the sell on the news type of profit-taking makes sense.

Logos for Chewy Inc. are displayed on the trading floor on the morning of the company’s IPO at the New York Stock Exchange (NYSE) in New York City, U.S., June 14, 2019. REUTERS/Andrew Kelly

Wall Street was quick to praise Chewy’s quarter, but did voice concern on the stock’s valuation.

“We also see continued opportunities to bolster sales and margins through ongoing progress in nascent verticals like private label and pharmacy. However, valuation of 3.2x NTM EV/Sales represents a near-peak multiple, suggesting the stock is pricing in continued elevated growth, although high short interest shows there is already some skepticism in the market,” Jefferies analyst Brent Thill wrote in a note to clients.

That said, it wouldn’t be a shock to see investors quickly return to Chewy once the dust settles. For one, similar to other live/work-from-home companies the pandemic has likely expanded Chewy’s total addressable market. Who wants to carry a 28 lb. bag of dog food through a supermarket anymore when you can sign up for Chewy’s Autoship (repeat deliveries).

Meanwhile, the pandemic has led to a surge in pet adoptions and related product sales.

“One unexpected result of COVID-19 has been the rise of new pet owners, as many Americans opted to either foster or adopt. There have been numerous stories of fostering facilities and shelters going empty, and Nielsen data shows a correlated uptick in retail sales,” notes Nielsen pet practice associate client director Sean Simpson.

Chewy’s Singh is seeing the same dynamic play out.

“If you leave data aside and ask us as practitioners in the space, we are seeing higher engagement from pet parents. People are home. They want to buy more toys. They want to buy more treats. The pets are getting fed more. In fact yesterday I was talking to somebody who was like my pet has gained 10 pounds. And the stories are true,” Singh explained.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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