Dive Brief:

• Citing strong demand and customer engagement, Chewy on Thursday reported net sales of $2.2 billion, up 24.1% year over year and 86% compared to 2019.
• The online pet retailer added over 2.6 million active customers from last year for a total of 20.4 million. Net sales per active customer increased 15.4% from last year to $419, according to a document filed with the Securities and Exchange Commission.
• Chewy’s net loss in the quarter narrowed slightly to $32.2 million from $32.8 million a year ago as a result of "sales momentum, gross margin expansion, elevated SG&A costs, and greater marketing efficiencies," the company said Thursday.

Dive Insight:

Chewy, which sells in a category that experienced a boost during the early days of the pandemic, appears to be benefiting from sustained demand. But that doesn’t mean it’s unaffected by industry-wide pressures, like labor shortages, increased freight costs and inflation, the latter two muting gross margin expansion in the quarter by about 100 basis points, executives said.

"Demand remained strong throughout the quarter, while inflationary pressures, product shortages and labor constraints made execution challenging," Mario Marte, chief financial officer at Chewy, said on a call with analysts Thursday. The retailer experienced shortages to things like wet dog food, as well as third-party and proprietary branded hard goods resulted in a negative net sales impact of about $15 million more than the company anticipated.

While some of these pressures may be temporary, others may persist, weighing on revenue and EBITDA growth, according to Wedbush analysts.

The retailer’s advertising and marketing costs in the quarter decreased by 11.7% from last year to $150.3 million, driven by lower advertising rates and, partially, by increased marketing effectiveness on Chewy’s part.

To position itself more as an online pet destination, and to help capture and retain customers, Chewy has made a big bet on services. The company built out its pet pharmacy, launched its "Connect with a Vet" telehealth service, introduced compounded medications for pets, created a marketplace for veterinarians and just this week announced it expanded into pet insurance with Trupanion.

Beyond this, executives said the company plans to expand into non-vet offerings as well — like grooming, training and boarding — which it believes has a total addressable market of $10 billion to $14 billion.

For the quarter ahead, Chewy expects Q4 net sales to be between $2.4 billion and $2.44 billion, while full-year sales are projected to be between $8.9 billion and $8.94 billion.