Chewy Falls With Street Seeing Sales Boom Pressuring Margins
Chewy Falls With Analysts Seeing Sales Surge Weighing on Margins
(Bloomberg) -- Chewy shares fell as analysts see the online pet-products retailer’s recent boom from people flocking to its site in the era of social distancing coming at a cost, along with uncertainty related to its withdrawn guidance.
Shares sank as much as 8%, before paring losses, following the company’s fiscal fourth-quarter earnings report late Thursday. The stock is set to extend its losing streak to four days, shedding roughly 10% since Monday.
“While the coronavirus has been a boon for (Chewy’s) demand and sales growth, we see a few dynamics that will weigh on margins in the quarter,” Wedbush analysts led by Seth Basham said in a note. And “investors may be uneasy that the company refrained from providing 1Q profit guidance or full year 2020 sales or profit guidance given the fluid coronavirus crisis.”
Chewy shares have risen 16% this year, as the Dania Beach, Florida-based company has been among the few beneficiaries amid the coronavirus outbreak that’s closed stores, curtailed travel and caused other business disruptions. But analysts see the recent surge also crimping the company’s margin expansion as it ramps up hiring and offers incentives for existing employees to work more hours to keep up with demand.
Here’s what analysts are saying:
Jefferies, Brent Thill
While Chewy “continued a recent trend of sales and gross profit driven upside, favorable 1Q guidance appears largely the result of Covid-19 and provides little insight into long-term growth potential.”
The “stickiness of recently acquired customers are difficult to predict and will likely play a large role in CHWY’s eventual results.”
Meanwhile, the firm noted that the company mentioned “a few dynamics that may result in a slowdown in recent margin expansion, including a near-term mix shift to lower margin consumables from Covid-19 and uptick in hiring ahead of anticipated demand.”
Still, the “material uptick in hiring,” which represents a 50% to 85% increase in headcount, “could indicate top-line growth acceleration.” And the company “earned its status as a near-term safe haven, benefiting from Covid-19 as people’s desire to avoid crowded areas facilitated an acceleration in the shift from offline to online.”
Has hold rating, with a price target of $33.
Wedbush, Seth Basham
Hiring more workers and giving current employees overtime pay and other incentives due to the additional hours needed to fulfill demand will weigh on margins in the quarter. Also, additional cleaning measures are being taken in light of risks related to the outbreak, which will likely lower delivery efficiencies.
Along with inefficiency from rapid hiring, “a sales mix shift to consumables could slow margin growth in the near term,” though the firm expects 150 bps of operating margin improvement in the first quarter and the company to inflect to positive adjusted Ebitda.
Still, the “stay-at-home” period is “likely to accelerate the secular shift to online shopping for essentials such as pet food.” While it is too early to be sure, new customers so far are “behaving similar to prior cohorts of new customers, suggesting they will be ‘sticky,’ driving sustained revenue growth.”
“Beyond the benefits from shifting customer behavior, we note that CHWY is making strong progress in building efficiencies in its fulfillment and customer acquisition,” the firm said.
Has outperform rating, with a price target of $44.
William Blair, Dylan Carden
“Chewy’s fourth quarter 2019 sales, gross margin and adjusted Ebitda were all ahead of expectations, rounding out consistent upside throughout the year, and reinforcing major themes we believe will continue to provide upside to both sales and earnings expectations in the years to come.”
The firm expects the trend in sales growth, which has come in “modestly ahead of expectations in each quarter,” to continue “as online migration in the pet space accelerates, turbo-charged by recent lockdowns that grow awareness and comfort of the channel.”
The firm does not see the recent surge in demand to be a “one-time benefit,” as the company “has a strong track record of fostering customer loyalty to leverage the recent influx of new customers,” among other factors. The firm also sees “this period of heightened demand, while straining near-term margins,” to “likely result in greater operational efficiencies and learnings on the back end.”
However, “combined with likely some disappointment on the near-term revenue guidance versus the limited early numbers, we believe lack of guidance could pressure shares in the more immediate term.”
Has an outperform rating.
RBC Capital, Mark Mahaney
With Chewy shares “dramatically outperforming the market and the sector,” the company “needed to put up very strong results. We believe they did.”
Sees fundamental trends being “positive, with revenue growth decelerating 5 points to 35% y/y, but gross margins solidly expanding y/y and Ebitda loss improving to a record low.”
“In this crisis, there are very, very few beneficiaries. But online shopping, especially of consumer staples and necessities such as pet products, is almost surely one of those.”
Has outperform rating, and raised its price target to $40 from $38.
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