Chewy stock soars amid earnings report

Chewy shares surge amid the company's earnings release. UBS Retail Analyst Michael Lasser joins Yahoo Finance Live to discuss Chewy's earnings report, the challenges with being an online-only pet product retailer, and the company's success amid inflation.

Video transcript

RACHELLE AKUFFO: Chewy's stock is soaring on its earnings release, reporting a surprise profit of $0.20 a share and topping forecasts for $2.73 billion. You see the stock up there more than-- up more than 22%. Now, earlier we spoke with Chewy's CEO, Sumit Singh. He broke down his thoughts on why pets are still taking precedence in people's lives even with inflation. Take a listen.

SUMIT SINGH: It's a proof point, pet remains resilient. That's one. And b, you know, Chewy's value proposition continues to resonate loudly. Customer engagement was super strong this quarter, which we were obviously pleased to see. And I think underneath of that, you're seeing a couple of different trends pick up, right? Supply chains have never been better. b, pricing, our pricing, is as-- as sharp and competitive as ever. Our delivery convenience and the way that we approach customers on personalized service, that bar has never been higher.

So when you combine all of that, you know, and provide customers this platform that they can engage with, it just drives massive levels of engagement. So we saw that come through in our autoship levels, where both active customer engagement is up. But also, NSPAC for owership was up. And then, generally speaking, customers engaging with us to build bigger baskets during Q1 was all a prevalent trend.

RACHELLE AKUFFO: Let's get more on that story with UBS' Food Retail Analyst, Michael Lasser. Thank you for joining me in this morning, Michael. So we heard the CEO there talking about customer engagement. But a lot of the concern that we saw from investors was on customer acquisition. What are your thoughts on that dynamic?

MICHAEL LASSER: I thought some of the dynamic is that Chewy is still going to have a hard time adding new customers. It's running into the limitations of its total addressable market. In the United States, it has 20 million active customers at this point. Our view is that if you haven't signed up for Chewy as a result of a pandemic, as a result of fears about going into retail stores, what is going to drive you to sign up for an online-only experience at this point?

If you are going to sign up, it's going to be very expensive for Chewy to harvest those customers. So we still have a healthy dose of skepticism on this stock at this point.

RACHELLE AKUFFO: And I mean, as we look at the title of-- of the UBS note, is the doggy bowl 1/2 full or 1/2 empty, so what is the case for it being 1/2 full?

MICHAEL LASSER: Case for it being 1/2 full is, to Sumit's point, they grew NSPAC, or sales per active customer, nicely in the quarter. A good portion of that is just inflation, given how fast prices are rising for consumable items like pet food. Chewy is benefiting right now from passing along some of those price increases to-- to its customers. In addition, it's benefiting from attaching more products, like flea and tick. That tends to be seasonal. But still, they're doing a really good job on that front.

The other thing that Chewy is showing good progress on is they're leveraging some of their fulfillment costs. As customers add additional items into the basket, Chewy is able to leverage the fixed costs of already sending that package to that customer. So each additional item comes at a higher profit rate. And we're seeing that come through its P&L. So those two factors would-- would be supportive of the-- of the bowl case at this right-- right now and would indicate that the-- the bowl is 1/2 full.

And on the 1/2 empty side, I mean, obviously, this is a competitive space. You-- also, you have the pet companies. But then, you also have your companies like Amazon, your other one-stop-shop, where you can get your pet food along with your other items all in one place. How is Chewy positioned first within the pet market itself and then against some of these other e-commerce giants?

Chewy deserves a ton of credit for growing this business to be on pace to have more than $11 billion of sales this year in what you rightfully point out is a very competitive market with a lot of entrenched players like Amazon, Petco, PetSmart, and others. With that being said, we still have our doubts about how the ultimate economics work of shipping pet food to a consumer's home for essentially no cost.

This is a high-volume weight business, these are high-volume weight products, that have very low margins. As a result, it's difficult to get the economics to work well when you're dealing with those two factors. And as a result, we think that, over time, Chewy is going to have to reinvest more of its profitability to drive the top line. And that's going to pressure what is already slim margins for this business.

RACHELLE AKUFFO: Indeed. People do have a lot of options out there. A big thank you to Michael Lasser, UBS US Hardline, Broadline, and Food Retail Analyst.

MICHAEL LASSER: Thank you.

RACHELLE AKUFFO: Thank you for joining us on Yahoo Finance today.

MICHAEL LASSER: Good to see you.