Dive Brief:

• Benefiting from heightened demand in the pet category, Chewy reported fourth quarter net sales increased 51% to $2.04 billion.

• The online pet retailer made its first quarterly profit, reporting net income increased 135% year over year to $21 million from a net loss of $60.9 million last year, according to a company press release.

• For the full year, Chewy's net sales saw a 47% year-over-year increase to $7.2 billion, while its net loss narrowed to $92.5 million from $252.4 million in the year-ago period.

Dive Insight:

With Chewy's latest earnings results, the pet space continues to prove to be one of the few categories benefiting from the pandemic.

As the pandemic upended most aspects of everyday life, people turned to pets as a source of comfort. The number of pet-owning households in 2020 increased by 5.7%, CEO Sumit Singh said during a call discussing earnings results.

Historically, the pet space has been able to withstand times of economic uncertainty and Chewy has been no exception. The latest quarterly results "amplified its industry-leading position and path to commanding market share gains still to come," Wedbush analyst Seth Basham said in an emailed client note.

Aside from operating in a category performing particularly well now, Chewy also has the added benefit of selling primarily online, someplace consumers are gravitating toward more lately.

But even prior to the pandemic giving a boost to e-commerce, trends indicated that for the pet space in particular, consumers were more willing to shop online, especially for heavy items purchased frequently like pet food.

To that end, Singh said he believes "these shifts in favor of e-commerce channels are durable and largely permanent."

But operating almost exclusively online has proven to have limitations. Oftentimes, the marketing and advertising costs associated with acquiring customers online can become prohibitively high for some brands — cutting into profits. While Chewy's net sales in the fourth quarter shot up some 51%, its advertising and marketing spend continued to soar, up 47.4% to $150.1 million, possibly putting future profitability at risk if consumers revert back to previous spending habits when the pandemic subsides.

Up until this quarter, Chewy had failed to reach a positive net income, which echos the challenges Wayfair has experienced. Until the second quarter last year, the retailer, which primarily sells home goods — another category benefiting from trends brought on by the pandemic — had reported mounting losses quarter after quarter. 

To combat this, brands have found value in having a physical presence of some sort, whether through pop-ups, owned leases or partnerships with traditional retailers, like Walmart, Target and Nordstrom.

While Chewy doesn't yet have a physical presence (it was once owned by PetSmart, but last October PetSmart announced Chewy would no longer be a subsidiary), it has expanded into adjacent categories, which may prove beneficial. Chewy has placed a greater emphasis on pet healthcare through its telehealth and pharmacy services. The retailer's Autoship subscription, however, may also help with retaining those customers it acquired in recent months.

In the fourth quarter, Chewy increased its active customer base by 43% year over year to 19.2 million, and Singh said its customer acquisition pace accelerated relative to the third quarter. Sales from its Autoship subscription during the quarter increased 46.1% to $1.4 billion, or 68.2% of total net sales. For the full year, Autoship sales increased 45.4% to $4.9 billion, or 68.4% of total net sales.

Singh also pointed to the fact that last year pet profiles for puppies and kittens increased 35% year over year, and profiles for newly adopted pets increased some 40%. As these pets grow up, it provides the potential for life-long customers for Chewy.