October 04, 2020

Thesis - Chewy is a leading e-commerce retailer for pets. This is a pure play on two key trends, e-commerce and the humanisation of pets. The number of pets is increasing globally and they are increasingly seen as part of the family, with more money spent on them. Chewy allows users to order food, treats, medicines and other dog products and have them delivered straight to your door.

Leadership - Chewy could be seen as the Amazon of pet care. In some ways, this is by design. The founder, Ryan Cohen, used Amazon as a template for the company, citing principles from Bezos’ original Amazon shareholder letter to drive the company vision. The current CEO, Sumit Singh, is a former exec of Dell and Amazon and drives its customer focused execution.

Financials & Performance - In Q2 2020, Chewy announced sales of $1.7b and customers of 16.6m up 47% and 37% YoY respectively. Whilst still loss making, the company is steadily reducing the losses. Gross margins are 25.5% and creeping up whilst spend per active customer is $356 and also on the rise. The company is known for its excellent customer service, with a large team of support members who are able to give advice on suitable pet products. The opportunity for growth in the industry continues to be large with only an estimated 14% of pet retail spend currently online. Importantly, around 70% of Chewy’s customers use their auto ship (subscription) program.

Risks - Chewy is showing great growth, buts its value is rich. With gross margins of 25%, the company needs to find further efficiencies as it scales. Built in its image, Amazon of course remains a threat, although Chewy seems to have carved itself a nice niche. Finally, Chewy has a slightly convoluted ownership structure having been bought by PetSmart in 2017 before going public in 2019. There is also some larger ownership in private equity, which means it could be subject to selling at some point.

chart showing Chewy increasing sales over time

Written by Stevan Popovic, growth investor, web developer and founder of this site.