Metric sales

Investors should not overlook this 1 vital metric for Chewy

Softit’s (NYSE:CHWY) fourth quarter was disappointing overall. Once a major tailwind, the coronavirus pandemic has become a headwind for the pet retailer. Supply chain disruptions, labor shortages and rising inflation hurt profit margins.

Meanwhile, the economic reopening is dampening customer acquisition as people have more options on where they can spend money. However, there is one bright spot in Chewy’s Q4 report that investors shouldn’t overlook.

Image source: Getty Images.

Existing Customers Spend More on Chewy.com

Net sales per active customer increased to $430 in the fourth quarter ended Jan. 31. This was up 15.6% from $372 per active customer at the same time last year. In other words, existing customers are increasing their spending on Chewy.com, a positive for sure. Chewy has been working on expanding item availability, and it’s paying off. Of course, more options for existing customers can have the effect of increasing sales per customer. Otherwise, consumers could spread their overall pet spending needs among multiple retailers.

Fueling this growth is a great customer value proposition. Shopping online is more convenient than going to a physical store in person. This saves individuals the time and resources needed to drive to the nearest pet store, search the aisles for the products they need, wait in line to pay, and return home. Plus, Chewy’s Auto-Delivery program gives pet owners the ability to completely automate the process. Much of pet spending occurs repeatedly; Rover needs his food and medicine every month. Indeed, in the fourth quarter, 70.7% of overall sales on Chewy.com were made through auto-ship. This high percentage of spend shows how much consumers value this option.

Chewy’s sales rose 16.9% year over year in the fourth quarter to $2.4 billion. Admittedly, the rate of growth was a deceleration from peak levels in the early stages of the pandemic. However, it was already admitted that most of the results for the quarter were disappointing. Adding to the list of negative factors is a 170 basis point drop in gross profit margin compared to the previous year. This all culminated in a return to net income loss of $63.6 million. Chewy had turned the corner on profitability, reporting a net profit of $21 million in the fourth quarter of last year.

The market focused on bad news

The market focused on the bad news from Chewy’s fourth quarter earnings, which was plentiful, as mentioned above. The stock was down 16.5% the day after the announcement. Overall, Chewy’s stock is down 64% from its early 2021 highs.

Fortunately, management is seeing some of the headwinds resulting from the pandemic turning around for the better. Brave investors ready to overcome short-term challenges can buy a great business at a discount. Chewy has a proven track record of growing revenue and increasing profit margins over the years, so investors can reasonably assume that management can weather the current challenges given enough time.

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Parkev Tatevosian owns Chewy, Inc. The Motley Fool owns and recommends Chewy, Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.