As Pet Mania Subsides, Chewy Hunts New Growth With Health Offers

How crazy has America gone over its pets lately? So crazy that Chewy's announcement this week that sales rose by "just" 27% sparked a minor sell-off, with investors worrying that consumers' seemingly endless appetite for dog toys and cat treats is slowing.

True, results from the ecommerce company, based in Dania Beach, Florida, did come in a bit shy of expectations. Revenues rose 26.8% in its fiscal second quarter, reaching $2.16 billion. Chewy’s net loss of $16.7 million, in part because of increasing advertising costs, also disappointed.

More concerning is that the fast-growing company lowered its third-quarter outlook, and the 21% increase in new customers fell short of goals.

Chewy's results do reflect a changing landscape: People aren't adopting pets like it's 2020 anymore. By some counts, as many as one in five people acquired a first or additional pet during the pandemic. Now, shelters report that adoption activity has receded to pre-pandemic levels, creating an inevitable slowdown in pet product sales.



Chewy says it isn't worried and that its robust sales numbers prove Americans are getting closer to their pets all the time. "Our results once again demonstrate the strength of our business model and the incredible bond between pets and pet parents," said Sumit Singh, chief executive officer, in its announcement. "Customer engagement is growing, and we are confident in our ability to deliver strong results while navigating uncertain market conditions due to the ever-evolving COVID-19 pandemic."

The stats bear this out. While noting the disappointing number of new customers, the ramp-up in Chewy's net spending per active customer is "indicative of strong customer engagement," writes Justin E. Kleber, an analyst who follows the company for Baird. That acceleration of 13.5% "reinforces our view of the embedded revenue growth from existing cohort maturation."

Customers acquired in the first half of last year -- when lonely work-from-homers adopted pets at a record pace -- are spending more than $400 net at Chewy. And those who have been Chewy customers since before 2016? Kleber notes they are spending more than $800, a clear sign that it's not just new pets that get the goodies.

Analysts are also optimistic about the growth potential of Practice Hub, Chewy's new healthcare offering. The service will enable and incentivize veterinarians to invite their customers to use Chewy for pharmaceuticals "and provide a topnotch customer experience," writes Seth Basham, an analyst who covers the company for Wedbush Securities. "This service could accelerate the growth of Chewy's pet Rx business. As importantly, the service further enhances relationships with veterinarians that are critical to driving the company's healthcare business in the future."

He expects the company to add more healthcare options, including pet insurance, in the near term.

Earlier this year, the American Pet Products Association released research showing that 70% of Americans now own at least one pet, up from 67% in its previous biennial survey. Millennials are the most enthusiastic, with 32% owning an animal, followed by baby boomers (27%) and Gen X-ers (24%.) And 14% of total respondents say they got a new pet during the pandemic.

The numbers of those now buying pet products online rose 20%, and a slight majority -- 51% -- say they are willing to pay more for ethically sourced products.

Meanwhile, it's not too early to think about what Fluffy and Rex should be for Halloween. The National Retail Federation reports that 18% of consumers interviewed in its 2020 survey intended to dress up a pet for the holiday.

Chewy is already advertising some of its best ideas.

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