Customers are becoming more “discriminating,” says Chewie, and stocks are rising on the windfall

“Although we are more isolated than some others, we are not completely exempt from the pressures currently facing the pet industry,” CEO Sumit Singh said on Chewy’s earnings call Wednesday. “Pet household composition remains relatively muted.”

However, he said, Chewy wasn’t just relying on his new pet ownership for growth. He said the company could build on other online features — including a new loyalty program that could launch next year — to steer customers toward more purchases.

He said the change in consumer behavior was not a cause for concern so far, and that while the company was “prepared to respond” to any rival push, it would not be the one to start the fight. He also said the company could rely on its customer relationship technology this year to adapt or shape the patterns of new shoppers.

“We did not have enough time to complete this,” Singh said. “So we expect what we see now in the future.”

Shares fell 2.7% after hours, after rising just after the close of normal trading.

The reversal came after the online pet supply retailer reported surprising second-quarter earnings and sales that beat expectations. However, the number of active clients declined and executives held onto their full-year forecasts amid a volatile spending backdrop.

“As expected, promotional activity in the second quarter was higher than in the first quarter,” Qiu said in a letter to shareholders. “However, the overall promotional environment remains largely rational.”

The company reported net income for the second quarter of $18.9 million, or 4 cents per share, compared to $22.3 million, or 5 cents per share, in the same quarter last year.

Revenue increased 14.3% to $2.78 billion compared to $2.43 billion in the prior quarter. The company finished the quarter with 20.4 million active customers, or customers who have paid for something via Chewy at least once in the roughly previous 12 months. This number decreased by 0.6% year on year.

Analysts polled by FactSet expected a loss of 5 cents per share on sales of $2.76 billion. They expected 20.4 million active customers during this quarter.

Chewy said it expects third-quarter net sales to be between $2.74 billion and $2.76 billion, compared to FactSet’s forecast of $2.79 billion. For the full year, it still expects sales of $11.15 billion to $11.35 billion. FactSet estimates are $11.29 billion.

And while some customers have become more selective, Chiu said in her letter to shareholders, others have become more loyal. The company said it was better protected from the downside of these shifts, thanks in part to its pet healthcare business and Autoship subscription service.

“With the onset of the summer months, we sense a shift in the consumer’s mindset towards being more discerning and, at the same time, with a greater desire to consolidate their share of the portfolio to the trusted retailer of choice,” the company said in its statement. Shareholder letter.

“This behavior is driven by a more resilient macro environment, including higher levels of inflation, that the industry has experienced over the past 18 months,” the letter continued. “Our dialogue with our suppliers confirms that these trends permeate throughout the pet industry.”

Pet store chain Petco Health & Wellness Co.

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He said last week that “discretionary spending continues to come under pressure” amid rising prices for other things, such as groceries. The executives there also noted that customers’ shopping patterns had diverged — toward cheap pet food and special offers.

Chewy’s chief financial officer, Mario Marti, retired from the company last month. And in May, executives said they expected to open shop in Canada in the third quarter. Singh said on Wednesday that the launch of its business in Canada is imminent, and that the impact will be felt in the fourth quarter. Also in June, the company said it would expand its pet and health insurance offerings.

JPMorgan analysts said recently that they expect trends at Chewe to remain “muted” during the second half of the fiscal year. But Wedbush analysts, in a research note last week, said Chewy may be more insulated from the difficulties the pet industry faces.

“Competitor readings and industry data points tend to be negative, but CHWY’s relative lack of exposure to discretionary products and competitively priced offerings that help it gain market share limits the downside risk, in our view,” they said.

Shares of Chewy are down 22.3% so far this year. In comparison, the S&P 500 SPX is up 18.1% in 2023.