There wasn't much in the first-quarter earnings report for Chewy (NYSE: CHWY) that investors didn't already know. The online pet supplies retailer that was spun off from PetSmart last month had forecast where it expected its bottom line to land, and it hit the mark.
Revenue jumped 45% in the first quarter to hit $1.1 billion, the second time the e-tailer had sales above the billion-dollar level, and it reported a net loss of $29.6 million, a 50% improvement over last year. Adjusted EBITDA showed a loss of $15.8 million, a near 70% improvement on the year-ago results.
Since everyone knew what to expect, the real focus was on Chewy's guidance for the second quarter and for the year.
Image source: Getty Images.
A dogfight with Amazon
The company shared forecasts that exceeded Wall Street's expectations, with revenue expected to rise to between $1.12 billion and $1.14 billion for the second quarter, and to $4.67 billion to $4.75 billion for the full year.
The problem is that its top-line growth is slowing while it is still sporting significant losses. Chewy's successful IPO led Amazon.com (NASDAQ: AMZN) to significantly cut prices in its Wag pet supplies brand, causing Chewy to respond with discounts of its own.
It launched a summer sale with discounts of as much as 50% on around 1,500 items, while also doubling the discount to new Autoship customers on their first orders, raising it to 60% from 30%. Autoship sales represented 67.1% of Chewy's first-quarter revenue and are products customers order frequently and have shipped on a predetermined schedule.
While the huge discounts will undoubtedly be temporary, getting into a price war with Amazon is still a mistake because Chewy's rival has proven adept at being a loss leader to gain market share. It also is able to use its very profitable Amazon Web Services division to subsidize its money-losing retail business, a backstop unavailable to Chewy.
It can't even count on PetSmart to bail it out even though it remains the majority owner of the pet supplier's business. Creditors have charged that PetSmart without Chewy is insolvent, and spinning off the e-commerce retailer was the only way the brick-and-mortar business could remain afloat. Now Chewy is going up against its biggest competitor in a battle where Amazon can easily outlast it.
Seeking new markets
Even if Chewy tactically offers discounts, it is still going to hurt margins and extend the length of time that it takes to achieve profitability, something rival Freshpet (NASDAQ: FRPT) has already achieved. Although much smaller than Chewy (let alone Amazon). With $54 million in first-quarter revenue, Freshpet is enjoying significant growth and was able to report adjusted EBITDA of $2.8 million.
Chewy is going after new verticals, such as the pet pharmacy business, which it entered a year ago. It sees this not only as an opportunity to engage with pet owners and veterinarians, but also as a vehicle for acquisitions. It just started a pet prescription monitoring service that it says has the potential to grow bigger than the consumables side of its Autoship business. But even here, Chewy will have to contend with the likes of established leader PetMed Express.
The pet care market is large and growing, and Chewy has the chance to become a top name in the space, regardless of Amazon's ambitions. But profitability is key if it wants to keep expanding.
A wait-and-see approach
Chewy's problem is its ability to navigate the competitive landscape. Investors also must contend with it having a majority owner that has complete say over how the business is run, which may be counter to outside shareholder wishes.
At this point, Chewy has more bark than bite, and investors should wait to see whether it can run with the big dogs.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.