A Closer Look at Chewy's Latest Earnings Report
Chewy, Inc. once again reported a big increase in sales (+43% YOY) and a big net operating loss (-$82.9 million) in its fiscal second quarter 2019 financial results, yet these figures tell us surprisingly little about how the online retailer is progressing as a major competitor in the pet care market and what the future may hold for the company. For better insight, it is important to take a closer look at specific aspects within Chewy's Q2 financial reporting. Here are two areas, in particular, that represent some of forces at play as the company looks to become profitable:
Chewy's gross margin grew to 23.25% for the first half of its FY19, which represents a trend that is not only ongoing but actually accelerating. After increasing from 16.6% in 2016 to 17.5% in 2017 to 20% in 2018, the company's gross margin went from 22.9% in Q1 to 23.6% in Q2 of 2019. That growth has largely been driven by improvements in Chewy's operating efficiencies, as well as a corresponding increase in the percentage of overall sales that come from auto-ship customers—sales that are inherently less expensive for the company. Moving forward, we can expect to see Chewy's gross margin continue to improve not only as a result of these forces, but also from the company's growing ability to use economies of scale to put pricing pressure on suppliers.
Expensive Customer Acquisition
Chewy's customer base has grown phenomenally over the past few years, going from a little more than three million in 2016 to 12 million in the first half of 2019. However, new customer acquisition has not been cheap for the company, and it is getting more expensive every year. In fact, Chewy went from spending about $68 in marketing and advertising for each new customer it gained in 2017 to $104 per new customer in 2018. So far this year, that number has gone up to about $148 per new customer.
While the company has seen a clear increase in spending among its current customers, the rising cost of new customer acquisition will undoubtedly impact its ability to grow at the impressive pace it has experienced over the past several years. Add the fact that Chewy is now in the position of having to defend its base from the growing threat posed by competitors such as Amazon and it becomes clear that the company will not be able to take its foot off the gas pedal anytime soon when it comes to marketing. That, of course, does not bode well in Chewy's pursuit of profitability.