Chewy on Tuesday reported second quarter net sales rose 43% to $1.15 billion from $805.6 million in the year-ago quarter, beating analysts expectations of $1.13 billion.
The company's net loss widened 31.3% to $82.9 million, which missed Wall Street's expectations "by nearly $40 million driven almost entirely by stock-based compensation expense," of $42.8 million, according to a note from William Blair analyst Dylan Carden. Gross margin expanded 300 basis points from last year to 23.6%.
Chewy also raised its third quarter and fiscal year outlook. For the third quarter, the company expects net sales to be between $1.19 billion and $1.21 billion, or a 36% to 38% increase from the year-ago quarter, CFO Mario Marte said on a call with analysts. For the full fiscal year, the company expects net sales to be between $4.75 billion and $4.8 billion, a 35% to 36% growth rate year over year.
In spite of posting stronger than expected sales in the quarter ending Aug. 4, shares for Chewy (which was acquired by PetSmart in 2017) were down as its loss widened.
However, executives on the call appeared confident in the pet e-tailer's business, prompting the company to raise its outlook. CEO Sumit Singh said Autoship subscription service customers drove significant sales.
"Active customers grew 3.4 million year-over-year to 12 million customers," Singh told analysts according to a Seeking Alpha transcript. "Net sales per active customer increased approximately 10% to $352, up from $320 in Q2 2018. Autoship customer sales as a percent of net sales reached 69.3%."
One segment that benefited from Autoship consumers, Singh said, was Chewy's healthcare unit. "The response pattern for Autoship should even be stronger for healthcare and we're seeing that come through," he added. The investments into healthcare are further fueled by the fact that more than "75% of pet parents out there have at least one pet that has a necessity for a health and wellness check or a health and wellness need in some way or the other," Singh said.
With threats of a recession getting louder, the investment into pet healthcare may bode well for the online pet retailer, which launched Chewy Pharmacy just over a year ago. "One of the positives in the pet industry is that it's been pretty much recession-proof. It's not very cyclical," Moody's Vice President Mickey Chadha told Retail Dive earlier this year. "The running joke ... was that people will stop taking their own medication before they stop medication for their dogs or cats. That's how important they are in today's world."
The investments in healthcare may also be the differentiating factor from e-commerce giant Amazon, which has been ramping up its own pet product offerings through its Wag private label.