Chewy says pet business is 'recession resilient,' but offers this warning

By Bill Peters and Claudia Assis

Chewy posts surprise profit, but after-hours gains evaporate as retailer says pet ownership is below average

Chewy Inc. on Wednesday surprised Wall Street with a profit for the quarter, but post-earnings share gains for the online pet-products retailer evaporated as it signaled muted prospects for the year ahead, as fewer people take on pet ownership and benefits from higher prices fall away.

Against that backdrop, Chief Executive Sumit Singh said he expected the pet industry to "return to normality" next year, after a boom in pet adoptions during the pandemic ran up against higher prices for groceries and other household necessities in 2022 that constrained consumer spending.

Singh said that the $144 billion U.S. pet business is "recession resilient," and Chewy remains a "key driver, leader and beneficiary" of the trend, after years of steady growth helped by demand for premium pet food and other higher-end products and services.

Chewy said it expects to deliver continued adjusted Ebitda margin expansion this year, regardless of the industry or macroeconomic backdrop. But it still expressed concerns this year as pet ownership remains below historical trends.

"As it relates to pricing, while we are not anticipating a deflationary environment, we expect no material pricing benefit on industry growth in 2024," Singh said. "These inputs will most likely result in a year of modest growth for the industry, setting up the industry for a return to normality in 2025."

Chewy (CHWY) earned $32 million, or 7 cents a share, in the fiscal fourth quarter, compared with $6.8 million, or 2 cents a share, in the year-ago period.

Sales rose 4% to $2.83 billion as food, treats and other essential consumables plus pet-health items continued to be "a pillar of strength" for Chewy, the company said.

Active customers, or the number of individual customers who paid for something on Chewy over the past roughly 12 months, stood at 20.1 million, about 2% lower year-on-year.

Analysts polled by FactSet expected Chewy to lose 4 cents a share on sales of $2.79 billion, and report 20.2 million active customers.

Shares immediately rallied more than 9% in after-hours trading before quickly giving up those gains, closing the extended session down 2.5%. The stock ended Wednesday's regular session up 6%.

Jefferies analysts in December said that Chewy "indexes to high-income groups" who are less affected by higher prices. But JPMorgan analysts, in a more recent research note, said that investor sentiment was "mostly cautious" heading into Wednesday's results.

That caution came amid worries about a decline in active customers, increased competition and a drop in pet adoptions, as customers prioritize higher-priced basics, they said.

Shares of Chewy are down 53% over the past 12 months, contrasting with an advance of around 32% for the S&P 500 index SPX.

Mizuho analysts said in a note this week that Chewy's focus on pet health and vet clinics would help insulate it from among the biggest threats to any online retailer - Amazon.com Inc. (AMZN). But they said the stock was likely to remain rangebound.

"Shares are likely stuck at current levels until clear evidence emerges that top-line growth has definitively bottomed and [Chewy] is back to adding new customers - both of which we cannot underwrite at this point," they said.

-Bill Peters -Claudia Assis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-20-24 2007ET

Copyright (c) 2024 Dow Jones & Company, Inc.