Chewy: pet supply retailer could be leashed by an acquirer

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Americans shower their pets with both love and money. Spending on pet food, supplies, veterinary care and other services totalled $136.8bn last year, up 41 per cent since 2019, according to the American Pet Products Association. The figure should grow another 5 per cent this year.

Yet fierce competition has left shares in pet supply retailers like Chewy and Petco in the doghouse.

Online shop Chewy this week cut its full-year sales guidance as inflation-weary shoppers grow more careful about their spending. It is contending with Amazon, Walmart and Target pushing into petcare too. Despite higher advertising and marketing spending, the number of active customers at Chewy fell 1.3 per cent year on year during the third quarter.

Shipping heavy bags of pet food for free has not been great for the bottom line. Ebitda margin — even on an adjusted basis — is a mere 3 per cent. Overall it booked a net loss of nearly $36mn as it paid out more share-based remuneration and taxes. 

Chewy wants to expand its offerings in pet healthcare. That makes sense. As pets grow older, they need more supplements, vet visits and medications. Animal health company Zoetis, which sells everything from flea pills to pet vaccines, has reported a sharp rise in sales and profits in recent quarters. Its shares have done well compared with peers.

At its peak in 2021, Chewy traded at nearly $119 a share. On Thursday shares traded below $19 for a market value of about $8bn. The stock now trades on just 0.8 times trailing revenue and has net cash.

Chewy is less of a turnaround play and more of an acquisition target. Compared with bricks-and-mortar rival Petco, it has an edge given its bigger online presence. Merging with a large big box retailer such as Walmart could help Chewy streamline its supply chain and lower its distribution costs. It needs to expand its margins. Either costs go down or it finds a way to sell more. A big owner could give it more scale. At this valuation it may find one.