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June 14, 2019, 3:27 p.m. EDT

Chewy IPO: 5 things to know about the ‘pet humanization’ products seller

Shares blast off as first trade at $36 was 64% above IPO price

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By Tomi Kilgore, MarketWatch

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There is an exception to that rule, given turnover and liquidity concerns, but that S&P Dow Jones Indices reserved that for Warren Buffett’s Berkshire Hathaway Inc. /zigman2/quotes/200060694/composite BRK.B +2.15%  .

There are risks associated with the lack of inclusion in those indexes, as it means investment funds that try to track the indexes won’t invest in Chewy shares. So there is a risk that exclusion from major market indexes makes its stock less attractive than those that are included.

Lyft and Pinterest also have dual-class structures, but the voting ratio between their Class B and class A shares is 20-to-1.

‘High-touch’ service is key for the e-tailer

Because one of Chewy’s missions to offer “personalized, high-touch customer service to every customer, every day and in every interaction,” the company needs inventory space to ship products quickly and customer-service centers. The company currently has seven fulfillment centers across seven states, three customer-service centers and two co-headquarters, in Florida and Boston.

“Our strategic placement of seven fulfillment centers across the United States enables us to cost-efficiently ship to approximately 80% of the U.S. population overnight and 100% in two days,” the company said in its S-1.

Chewy Inc. S-1

The company believes this attention to service helps boost customer loyalty and spending over time.

“Our customers spend more on average the longer they remain active, increasing their total spending with us after the first year from their initial order,” Chewy said. “Customers who remain active on our site spend an average of three to four times as much in their third year as they did in their first year, and total net sales across all customers in that cohort increase over time, reaching approximately 1.5X their first-year sales.”

Net sales per active customer was $334 in 2018, up 7.7% from $310 in 2017, which was 4.4% more than $297 in 2016.

And as evidence of a high customer-retention rate, the company said in 2018, it achieved 120% of sales from the existing customer base from the prior year.

People are spending more on pets, and for a long time

Chewy said it believes it is well positioned to reap the benefits of continued growth in the “highly attractive” pet industry. One reason the pet market is attractive is growth has continued unabated, even through the last recession from 2008 to 2010.

Chewy Inc. S-1

Sales of products and services reached $70 billion in 2017, and is expected to grow at a compound annual growth rate (CAGR) of 4.2% to 2022, according to Packaged Facts data.

But Chewy can grow even faster than that, as the e-commerce share of the pet food and supplies market is projected to grow to 25% to 2022 from 14% in 2017.

Helping to support sales growth is a rising number of households with pets, which climbed to 85 million as of the end of 2016 from 73 million in 2010, according to the American Pet Products Association (APPA). The growth spans generations, as the percentage of young adults, ages 18 to 24, that own pets has grown to 53% in 2017 from 44% in 2010, according to Packaged Facts.

Chewy Inc. S-1

Chewy said it believes the “pet humanization” trend is what is driving the increased spending per pet. There are three areas the company believes the trend manifests itself:

• Premium consumables : Pet parents are becoming more concerned about pet health, as about 75% of pet product buyers in 2018 were willing to pay more for healthier pet food products, according to Packaged Facts.

• Health care : When considering large medical expenses, about 25% of dog and cat owners said they would prioritize their pets over themselves and another 25% weren’t sure who they would prioritize, according to the APPA survey. And about 75% of dog owners and more than half of cat owners gave their pets medication in 2016.

• Services : Annual spending on nonmedical pet services, such as grooming, boarding, sitting, walking and training, grew to $131 in 2017 from $105 in 2013, according to Packaged Facts.

Most of Chewy’s sales come from subscriptions, and that’s growing

Another attractive aspect of the pet-products market is that it is well suited to recurring revenue through subscription sales, as evidenced by the big jump in Chewy’s Autoship subscription program, which provides automatic ordering, payment and delivery of products. Autoship customer sales jumped to $2.3 billion in 2018, representing 66% of total sales, from $1.3 billion, or which provide, have increased to 66% of net sales in 2018 $2.3 billion, or 62% of total sales in 2017.

Chewy Inc. S-1

The company believes higher recurring sales have helped to drive increasing lifetime value (LTV) of its customers. And Chewy said its customers have longer LTV than most e-commerce sites, helped by the length of pet ownership.

LTV is calculated as the cumulative contribution profit over a period of a particular “cohort” divided by the number of new customers acquired during that period. A cohort is the number of new customers acquired during a given period.

The average length of dog and cat ownership is roughly 18 years, Chewy said, citing an APPA survey. The survey also showed that only 16% of current pet owners wouldn’t get another pet if the current pet died.

$ 179.73
+3.78 +2.15%
Volume: 7.28M
April 2, 2020 6:30p
P/E Ratio
Dividend Yield
Market Cap
$427.71 billion
Rev. per Employee

Tomi Kilgore is MarketWatch's deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

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