Shares of Chewy Inc. fell after hours on Wednesday after the online pet-supplies retailer said it expected the industry to cut prices and said it was trying to get a better read on newer, more selective and price-pressured customers.
Chewy’s
CHWY,
executives made the remarks as inflation spurs greater caution on pet owner and spending on pet care. Against that uncertain backdrop, management tried to prepare Wall Street for a wider range of behaviors among its active customers this year, after signs emerged last month that customers were switching from wet food to dry food — an indication of a shift toward a cheaper product — and otherwise becoming more “discerning” about what they buy.
“While we’re more insulated than some others, we are not fully exempt from the pressures currently facing the pet industry,” Chief Executive Sumit Singh said on Chewy’s earnings call on Wednesday. “Pet household formation remains relatively muted.”
Still, he said that Chewy wasn’t solely dependent on new pet ownership for growth. He said that the company could rely on other online features — including a new loyalty program that could launch next year — to steer customers toward more purchases.
And he said that the change in consumer behavior wasn’t cause for concern just yet, and that while the company was “ready to respond” to any discounting from rivals, it wouldn’t be the one to start the battle. He also said the company could lean on its customer-relations technology this year to adapt or mold the patterns of newer shoppers.
“We just haven’t had enough time for this to play through,” Singh said. “So we’re projecting what we’re seeing right now forward.”
Shares fell 2.7% after hours, after rallying immediately following the close of regular trade.
The reversal came after the online pet-supplies retailer reported a surprise second-quarter profit and sales that beat expectations. However, active customers slipped and executives held to their full-year outlook amid a wavering spending backdrop.
“As anticipated, promotional activity in the second quarter was higher than in the first quarter,” Chewy said in a letter to shareholders. “However, the promotional environment on the whole remains largely rational.”
The company reported second-quarter net income of $18.9 million, or 4 cents a share, compared with $22.3 million, or 5 cents a share, in the same quarter last year.
Revenue rose 14.3% to $2.78 billion, compared with $2.43 billion in the prior-year quarter. The company finished the quarter with 20.4 million active customers, or customers who paid for something via Chewy at least once during roughly the prior 12 months. That figure was down 0.6% year over year.
Analysts polled by FactSet expected a loss of 5 cents a share on $2.76 billion in sales. They expected 20.4 million active customers during the quarter.
Chewy said it expects third-quarter net sales of between $2.74 billion and $2.76 billion, compared with FactSet expectations for $2.79 billion. For the full year, it still expects $11.15 billion to $11.35 billion in sales. FactSet estimates call for $11.29 billion.
And while some customers were becoming more selective, Chewy, in its letter to shareholders, said others were becoming more loyal. And the company said it was better shielded from the downside of those shifts, thanks in part to its pet health-care business and Autoship subscription service.
“Coming out of the summer months, we are sensing a shift in consumer mindset toward being more discerning, and at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice,” the company said in its shareholder letter.
“This behavior is driven by a more fluid macro environment, including high levels of inflation, which have been passed through the industry over the past 18 months,” the letter continued. “Our dialogue with our suppliers confirms that these trends are permeating throughout the pet industry.”
Pet-store chain Petco Health & Wellness Co.
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said last week that “discretionary spending was continuing to be pressured” amid higher prices for other things, like groceries. Executives there also noted that customer shopping patterns had diverged — toward both cheaper pet food and premium offerings.
Chewy’s chief financial officer, Mario Marte, retired from the company last month. In May, executives said they expected to open up shop in Canada in the third quarter. Singh on Wednesday said the launch of its Canadian business was imminent, and that its impact would land in the fourth quarter. The company in June also said it would expand its pet-insurance and wellness offerings.
JPMorgan analysts recently said they expected trends at Chewy to “remain muted” through the second half of the fiscal year. But Wedbush analysts, in a research note last week, said Chewy might be more insulated from the pet industry’s difficulties.
“Competitor read-throughs and industry data points lean negative,” they said, “but CHWY’s relative lack of exposure to discretionary products and price-competitive offering that is helping it gain market share limits downside risk, in our view.”
Shares of Chewy are down 22.3% so far this year. By comparison, the S&P 500 Index
SPX
is up 18.1% in 2023.