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Chewy: Autoship Is the Gift That Keeps on Giving

Motley Fool - Sat Oct 7, 2023

Chewy(NYSE: CHWY) has positioned itself on top of a powerful consumer trend -- people increasingly treat their pets like part of the family, which often means splurging on them like family.

While the potential for a recession has some investors worried about Chewy's near-term outlook, the humanization of pets is a long-term shift. And that's what makes this one key metric at Chewy so interesting.

Chewy's results have been mixed

The first thing to note about Chewy's fiscal 2023 second-quarter earnings is that its active customer count fell 0.6% year over year. That's not a good sign, and it reflects the muted growth in pet households following the surge the country saw during the pandemic.

A dog with sunglasses on sticking its head out a car window.

Image source: Getty Images.

But this minor pullback was easily offset by the 14.7% growth in average spend per active customer. To be sure, inflation has contributed to that increase as Chewy passed rising input prices onto shoppers.

At the same time, Chewy's customers are becoming even more loyal to the company. As management noted in the latest shareholder letter, "Coming out of the summer months, we are sensing a shift in consumer mindset towards being more discerning, and at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice."

Overall, Chewy was able to increase sales 14.3% last quarter. Although adjusted earnings were flat year over year, that's not such a bad outcome when factoring in the higher spending related to the company's expansion into the Canadian market.

There is one number, however, that truly stands out from the quarter: 75.5%.

Chewy's got an annuity-like business

That 75.5% figure, up 2.4 percentage points year over year, is the portion of overall sales attributable to Chewy's Autoship program. This is huge.

Autoship acts like a subscription -- customers find products they like and then sign up to have them delivered at regular intervals. The service simplifies the purchase process for common consumables like pet food, treats, and medication. It also saves the customers the time and hassle of going out to regularly buy the products at a store.

There's a bit of inertia here too when it comes to changing something that's working well, so these customers are likely to be fairly sticky. Autoship is a win/win for the consumer and the retailer.

But step back and think about this from a big-picture perspective. Over three-quarters of Chewy's sales are on autopilot. The retailer's customers have automated those purchases with the company. That's a substantial portion of the top line acting like an annuity, something most retailers would love to have. And this customer loyalty provides a strong foundation for the company's business, including its ability to forecast demand and manage inventory.

A unique feature for Chewy fans to watch

If you're interested in the potential of the pet industry, Chewy is going to end up on your radar. Its market dominance and expansion into new regions already make the stock appealing. Add to that the resilience that Autoship provides to the top line, and this is a stock you can own through good times and bad.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.

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