Story Stocks^®

It has been a game of tug-of-war between buyers and sellers of online pet food and supplies retailer Chewy (CHWY +1%) today following its upbeat Q4 (Jan) report and Q1 (Apr) guidance. CHWY produced its fifth straight quarter of bottom-line upside on a rapid uptick in top-line growth during the quarter. The company anticipates sustaining this momentum, projecting Q1 earnings and revenue above consensus.

• A central highlight from Q4 was CHWY's 15.0% revenue growth yr/yr to $3.25 bln, well above its $3.18-3.20 bln forecast and representing nearly 10 pts of acceleration over the previous quarter and returning to double-digit growth for the first time since 2Q24 (Jul). The robust growth was underpinned by healthy active customer growth, a slight rebound in CHWY's hard goods merchandise category, and sustained Autoship customer loyalty across consumables and health & wellness categories.
• Autoship is a vital component of CHWY's quarterly performance as it creates a dependable recurring revenue stream. Often, customers are slower to switch to a competing pet food supplier when they already have an active Autoship setup on Chewy.com. In Q4, Autoship represented 80.6% of total sales, with revenue growth of 21% yr/yr, which outpaced overall top-line growth.
• Also helping push revenue demonstrably above estimates in Q4 was active customer growth, ending FY25 with 20.5 mln active customers, CHWY's first year of yr/yr growth since FY23. Management attributes the long-awaited recovery to its ongoing efforts to bolster and refresh its assortment, enhance mobile app experiences, and refine its marketing strategy. CEO Sumit Singh believes that CHWY reached an inflection point regarding active customer growth, anticipating further gains in 2025.
• Turning to profitability, CHWY's adjusted EPS of $0.28 marked its best quarter since the beginning of FY25, fortified by adjusted EBITDA margins tagging the high end of CHWY's guidance of 4.6-4.8%. The company's sponsored ads business, where it allows brands to advertise on Chewy.com, is a major factor in its healthy margins. For the year, this business reached around 1% of net sales, roughly 2 pts away from CHWY's reiterated long-term goal.
• CHWY does not anticipate its momentum to cease over the next few months, targeting Q1 adjusted EPS of $0.30-0.35 and revs of $3.06-3.09 bln. Management noted that its sales growth will likely be driven by further active customer growth, expecting low-single-digit gains yr/yr, and minimal price inflation. On profitability, CHWY mentioned that margins will likely follow a similar cadence as last year, with modest sequential declines throughout FY25 due to seasonality and investment timing.

While today's price action is muted, CHWY's Q4 report was plenty loud, delivering several highlights as it benefits from the relative price inelasticity of pet food. Demand for hard goods will likely remain somewhat retrained over the next several months as consumers battle compounded inflationary effects. However, CHWY's consistently sound performances showcase that it can still realize meaningful growth despite economic headwinds as it reels in impressive gains from its Autoship program. At the same time, CHWY is improving its margin profile, which should only accelerate once broader demand conditions turn.