• by Sarah Mahoney  @mahoney_sarah, August 31, 2023

Chewy continues to win with America's devoted pet parents, with second-quarter results beating sales and profit expectations. Its gains in market share come amid changing marketing tactics. But it also reported a decline in active customers and a rise in customer-acquisition costs.

Sales climbed 14.3% to $2.78 billion for the quarter, compared to $2.43 billion in the second quarter last year. Net income fell to $18.9 million from $22.3 million in 2022.

The Plantation, Florida-based ecommerce company gained market share, which it partly attributes to the strength of its autoship and healthcare offers.

Advertising and marketing spending for the quarter rose to $185.5 million, up from $144.2 million in the year-ago period. That amounts to 6.7% of sales, staying in its preferred range of limiting ad spending to between 6% and 7%.

Its tactics are shifting, as Chewy's ad plan "leans into higher-funnel advertising and new channels," writes Seth Basham, an analyst who follows the company for Wedbush Securities. He adds that changes are based on lower costs for reaching and reactivating former customers than for acquiring new ones.

"We're always trying to find that point where the campaign becomes negative-returning," says Sumit Singh, Chewy's chief executive officer, on a conference call webcast for investors. "We've experimented with trying to spend money to pick up discretionary customers, and it's just not a high ROI effort right now. So we would rather maintain the quality that drives the repeat purchase. Our performance marketing teams appropriately adjust to find the best customer, the best return across the best channel."

Overall, Basham regards Chewy's numbers as mixed, although he continues to rate the company as likely to outperform its peers. Sales topped expectations, even in a more challenging retail landscape. But net customer adds declined.

"We continue to see long-term value in Chewy's business model that benefits from secular trends favoring online channel mix and higher pet spending," he says. That's further augmented by international expansion, including in Canada, and initiatives such as sponsored ads and healthcare. "However, industry/macro pressures are still holding back active customer growth, a factor that we believe should ultimately prove transitory. But near-term visibility on when this tide may turn remains elusive."

Rupesh Parikh, an analyst who follows Chewy for Oppenheimer & Co., is slightly less enthusiastic. He too still expects Chewy will likely outperform others.

“We are maintaining our financial projections,” he writes, “but removing Chewy from 'Top Pick’ status amidst increased uncertainty,” including when the company might begin adding new customers again.