CHWY

Chewy

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-$36.49 -53.89%
Paul Cerro's avatar
$36.4m follower assets
Why Petco $WOOF Is A Better ROI Than Chewy $CHWY
We outlined why on a business level, Petco $WOOF makes more sense than Chewy $CHWY

The latter is inherently limited to what business goods/services it can offer.

"Retailers are not dead, they just had to evolve. Petco has done this and has executed very well so far. Chewy, on the other hand, has barely been able to generate adjusted profitability while generating almost $10 billion in sales. And honestly, if you can’t generate profitability, and I mean true profitability, during PEAK times (aka COVID) then you most likely never will."

I see a company in Petco that allegedly has a flywheel but is seeing revenue growth slow faster than Chewy. You said:

But even then, sales growth for Chewy has slowed down dramatically since COVID, only barely keeping above low double-digit percentages YoY. Petco is dealing with the same issue but based on high single-digit percentages.

That's not really accurate though. Unless I misunderstand, you're comparing Chewy's two most recent quarters of YoY growth (12.8% and 13.7%, respectively) vs. Petco's TTM growth (8.6%). Those are different measures. Compare like-statistics and Chewy is nearly doubling Petco in TTM revenue growth (16.6% vs 8.6%) or compare the most recent quarters and Chewy is more than 3xing Petco (12.8% in Q2 and 13.7% in Q1 for Chewy vs. 3.2% and 4.3% for Petco).

I also see Petco as a company that has a far greater reliance on employees, something that is a headwind. Chewy generated over $415,000 per employee their last FY while Petco clocked in at just over $200,000 per employee. Being a physical retailer may have some benefits but they come with capex and employee costs that online retailers don't have to worry so much about.

I'm also not sure why Petco offering all those services is seen only as a positive. Some of them require significant investments up front and come with the added risk of more downside should the economy turn. Pet food and basic supplies are recession-proof. Pet grooming is not. Pet boarding and doggy daycare and and puppy training are not. Thankfully Petco hasn't poured too many resources into some of these as they partnered with other companies but Chewy can do that also if they'd like. They haven't tapped into those services yet and are still outselling Petco.

On the partnering aspect, it also feels misleading to asterisk Chewy's pet insurance while notating it's offered through Trupanion while not doing the same for Petco's boarding (offered through Rover).

I certainly have Chewy-tinted glasses on. It's absolutely anecdotal but I use them for everything (pet owner all my life, currently with 3 cats and a big dog) and so do my friends. I don't even know if there's a Petco or PetSmart near me. I do know where Target and Walmart as though and I went there to get flea shampoo when my dog brought them home. And when I ran out of monthly flea medicine and needed it right away, I went to Costco. Again though, anecdotal. Chewy-tinted glasses. However, it feels like you have Petco-tinted glasses. Some aspects of your otherwise very well-written deep-dive feel slanted, as I mentioned above, to paint Petco in a better light than maybe they should be and Chewy in a worse light than maybe they should be.

Only time will tell though. I'll bookmark this and we can re-visit in 20 years, see if either still exist and if either worked out as good long-term investments.
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Pet Food
Pet food is a category that is beginning to mirror human diets where owners are paying close attention to ingredients and the overall dietary substance. On the other side there are 90m+ who need to buy food for their pets and not everyone is particularly interested in optimizing their pets diet.

When ignoring the idiosyncratic differences in inventory & factoring in small time stores there are >80,000 locations where you can buy pet food. There are ~90m families in the United States with a pet & $CHWY has ~20m customers with 73% of revenue coming from Autoship. On the high end this points to ~16% of US pet owners subscribing to Chewy's Autoship.

Counterintuitively I think pet food is one of the better use cases for ecommerce. At first I was worried shipping costs would drag down Chewy but that's because I was assuming they must operate in a world of fast 2 day shipping. The need for pet food is extremely predictable, if your dog needs a new 40lb bag of food on October 12th, why can't Chewy have the food leave the warehouse 3 weeks prior to arrival? I am assuming it is possible to negotiate lower rates with UPS/FedEx due to the lack of urgency for these deliveries. Basically whenever one of these companies has some slack they can slowly move the food along it's desired route while also ensuring it is delivered on the date needed.

In theory it's possible to decide your pet's diet the very first day you adopt them & have the food automatically delivered over the course of it's life. There is nothing proprietary about Chewy's Autoship, it's just that they've gained the most traction. There is no reason to discount the possibility of Walmart or your favorite grocery store pursuing consumers to sign up for Autoship as it would allow them to free up valuable shelf space in stores. (Not to mention the looming threat from Amazon)

I'm still not sure what the takeaway here is. On one hand pet food appears to be a bit of a commodity as it can be bought in so many different locations. On the other hand we know the tides are shifting where the food choices are becoming more nuanced. With an increased desire for owners to choose the 'right food' I think this is where the Chewy funnel becomes valuable. Steering 20m consumers in a particular direction can translate to some serious buying power when they purchase wholesale.

I'm sure @paulcerro has some thoughts but I think it's clear that many consumers prefer to order their petfood online, as there is no shortage of brick & mortar locations where pet food is sold.
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Our dog is a super picky eater, and we recently started buying her Freshpet because she wasn't eating at all. I want to think that a picky dog is an exception and not a norm— but perhaps there is weight to what you're saying about how pet diets are improving.
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Brett Schafer's avatar
$26.5m follower assets
Podcast: Petco vs. Chewy
Today on Chit Chat Money we released a discussion with @paulcerro on Petco $WOOF and why it is better positioned than Chewy $CHWY over the next few years.


Here are some questions we asked him on the show:

  • Why are physical locations an advantage for Petco?
  • What about Chewy's model makes it tough to achieve profitability?
  • What are the value-added services Petco is moving into?
Back From My Hiatus - Let’s Get To Work
I finally got settled in my new home - it’s time to get back to work.

Selling a house and moving into a new one has been my focus, but it’s time to get back to the market!

As I make my come back, I’ll be taking ticker requests. Feel free to comment below what you want me to analyze.

Let’s make some money. My current positions are $NIO March 2023 $15p, $NIO short sells, $PANW short sells, and $CHWY short sells.

All of these are a medium term swings for me. 📣
I’ll definitely follow along with the NIO short developments.

And I’m always interested in hearing your up to date thoughts on $ETH.X . You couldn’t have been more right on your last call around $1,700 to drop down to $1,000k. Shame I didn’t listen, but that’s on me 🙃
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Pat Connolly's avatar
$123.9m follower assets
A newfound appreciation for $CHWY
20 Million Customers, of which 70% are enrolled into Autoship.

Think about the LTV/CAC calculations going on here. A cat or dog lives on average 10+ years & eat extremely regimented meals. Everyone knows you give your pet X amount of food three times a day. There is basically no variability in their diets and the volume consumed. This makes it extremely easy to time out when you will need your next bag of pet food and have it scheduled for delivery as needed.

An annuity is a finite set of level sequential cash flows

An Autoship customer buys X amount of food every Y months for 10+ years

The cash flows associated with these two statements look awfully similar, except Chewy's cash flows have an embedded inflation escalator.

Consumers are fickle and projecting habits & preferences into the future is a difficult task but I really do not see a reason why Autoship customers would cancel subscriptions in order to buy 40lb bags of food in person, so I do not believe physical retailers are a strong threat to Chewy's business model. Amazon can certainly replicate Chewy's Autoship feature but are currently reliant upon third party sellers who do not have the same buying power as Chewy. Amazon has a massive edge when it comes to costs associated with shipping & warehousing but Chewy has real buying power on the wholesale side of things.
You bring up a good point in how Chewy autoship helps with retention, but what you're missing is what else it can/can't do. Chewy is not a full service pet company and there lies the issue. It's can't get past basic DTC products.


As a pet owner, why would I want to get my pet's services and needs from so many different places? The answer is, I wouldn't. This is why Petco/PetSmart is superior to Chewy.

Petco's $WOOF full-stack ecosystem motivates more pet owners (specifically cats/dogs) to go to a one-stop shop like them. This captures more share of the wallet and creates a network effect with other pet owners.


The two links above prove both of these points and the link below breaks down Petco overall.


Also, Petco has 24.1M pal rewards members. :)
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