Chewy Inc Earnings - Q4 2024 Analysis
Positives
- Strong year-end results showcased the power of Chewy's business model and ability to deliver increasing levels of profitability and FCF while investing in the business.
- The company continued to demonstrate operating expense leverage in Q4 with SG&A of $601 million or 18.5% of net sales, representing a 150 bps improvement on a YoY basis.
- Autoship customer sales increased by 21.2% to $2.62 billion in Q4 and 10.6% to $9.39 billion for the year.
- The company successfully opened eight CVC locations, reaching the upper end of its target range for the year of four to eight openings.
Q&A Highlights - Q4 2024
Analyst asked about the factors driving the change in active customer growth for Chewy Inc.
The company's active customer growth returned to a positive trend in Q4, driven by improvements across the customer equation, including an increase in new customers, reactivations, and a decrease in churn. The company attributes this growth to its execution and strength in the market, rather than a significant change in the pet spending environment. The company has implemented several strategies to optimize its marketing efforts, including connecting the marketing funnel to expand reach, building a sharper ability to identify and target customers, and a rebuilt internal bidding model that drives higher conversion and optimizes for CCP. These efforts have allowed the company to lean into stronger demand signals and invest more heavily in Q4, while simultaneously driving efficiencies and adding over 400,000 customers. The company expects this momentum to continue into 2025.
Analyst asked about the momentum on the gross margin side and the expansion opportunity in 2025.
The company expanded its EBITDA margin by 150 bps in 2024 compared to 2023, with about 60% of that driven by improvements in gross margin, including growth in sponsored ads, product mix accretion, and normal efficiencies. The company expects a similar growth profile in terms of contribution from gross margin and other lines of OpEx in 2025, with a midpoint of 75 bps EBITDA margin growth compared to 2024. The company expects the trends that it saw in 2024 to extend into 2025.
Analyst asked about automation and the bridge to the 70% to 80% expected over time.
Automation is currently at 40% volume, and the company is ramping up more volume through the Houston facility, with the Dallas facility remaining important for fulfillment. Utilization of the network is around 70% to 75%.
Analyst asked about the gross margins and sponsored ads being the largest contributor to improvement.
Sponsored ads were the largest contributor to gross margin in 2024, and the company has launched its first-party software, which allows for new media content, ease of use, and off-site ads. The first-party software stack has been launched and is operating as expected.
Analyst asked about the growth investments as a stimulant for 2025 and the broader consumer landscape.
The company is looking at net new investments, such as CVC, which is a new channel bringing in a higher proportion of new customers, and existing strengths, such as the specialty category, which continues to attract more customers. App and Chewy+ programs, which are on-site products, cut across demographics and income levels, and the conversion from free trial to paid is high. The app performance continues to strengthen, with installs growing 20% YoY and the number of customers making their first app purchase growing by 34%. The company is always looking for new and incremental ideas to offer to customers.
Analyst asked about the company's guidance for 2025, specifically regarding marketing as a percentage of revenue.
The company expects marketing as a percentage of revenue to be within the range of 6% to 7% for 2025, similar to the levels seen in 2022, 2023, and 2024. The company does not have a specific target for any specific quarter, but they may have a quarter that is slightly more or less than others due to the timing of certain campaigns.
Analyst asked about the factors that contributed to the outperformance of hard goods in Q4.
The company attributed the outperformance to a combination of factors, including investments in site experiences, the rise of the app, and an increase in the new customer file.
Analyst asked about the specific categories that outperformed or underperformed in Q4.
The company saw a broad-based improvement across categories, including leashes, collars, tech, beds, and toys, due to the hard work of the teams in increasing selection, assortment, and search.
Analyst asked about the incremental CapEx spend and how the company feels about FC capacity for the next couple of years.
The company expects the low end of the CapEx range to be around 1.5%, which would imply CapEx growth of upwards of 30% YoY. The incremental CapEx spend is related to improvements in healthcare, specifically satisfying pharmacy demand, and the continued expansion of vet clinics. The lion's share of CapEx is still related to fulfillment centers and automation projects.
Analyst asked about the online migration of the pet industry, specifically the percentage of the industry that is online and if it has normalized.
Sumit Singh, CEO of Chewy, answered that the company's estimate was that 28% to 33% of the pet industry was online, with a breakdown of 28% to 30% for e-commerce, mid-teens for pharmacy, and 30% to 35% for food and supplies. He also stated that the migration has fully normalized, and the secular trend towards e-commerce has continued to pick up in Q4.
Analyst asked about the company's expectation that it will continue to capture share beyond the general category's growth.
Sumit Singh explained that the company's guidance of 6% to 7% growth is twice the market's expected growth of 2.5% to 4.5%, indicating that the company is capturing an incremental portion of share. He also mentioned that e-commerce has picked up a bigger share of normalization and conversion relative to other channels, which he believes will continue to strengthen as the company moves forward.
