Author: Antoine Nguyen

Chewy is off to a positive start in 2023 and the online pet products retailer can thank its Autoship customers for that.

The retailer posted a 14.7 percent year-over-year increase in its first-quarter net sales, improved its gross margin by 90 basis points to 28.4 percent and reported earning per share at five cents, not the loss of four cents expected by analysts.

CFO
CFO
Mario Marte said that sales to autoship customers were up 18.6 percent in the first quarter.

“Autoship customer sales have grown to represent 74.7 percent of total net sales. Our primary measure of customer engagement, NSPAC (net sales per active customer), grew 14.8 percent year-over-year to $512, driven primarily by our large customer base that spends more with us over time, growing Autoship customer sales and increasing levels of cross-category purchases by our customers. Both NSPAC and Autoship customer sales reached new record highs for the company,” Mr. Marte told analysts on Chewy’s earnings call.

“Autoship is a big factor in Chewy’s success, however it’s their outreach to shoppers prior to the auto-ship order being processed that seals the deal for most customers,” wrote Deann Campbell, chief strategy officer at Hoobil8, in an online discussion about Chewy’s earnings on RetailWire last week. “Giving shoppers a heads up prior to billing and making it easy to adjust order timing is what really instills to trust and creates loyal customers, one of which is me! Without this piece, autoship often does more harm than good as shoppers resent being billed automatically, and resent having to track refill timing by themselves.”

Other members of RetailWire’s BrainTrust of industry insiders likewise saw autoship as one well-executed element in Chewy’s overall solid strategy.

“Chewy is a very good business that treats customers well, that’s part of their success,” wrote Neil Saunders, managing director at GlobalData. “However, they also operate in a segment where buying is essential and habitual which makes auto-shipping a useful option. One of the good features of Chewy is that the customer is always informed and remains in control over orders. There are no surprise shipments or charges.”

“it’s clear that autoship (with its high penetration of total sales) is driving the sales right now, but I would also credit Chewy’s very clever and appealing marketing campaign. (Favorite child, anyone?)” wrote Dick Seesel, president of Retailing in Focus.

Chewy said the quarter ended with a “modest” increase in active customers compared to the fourth quarter of 2022. The retailer said it had 20.4 million active customers in the first quarter.

The company’s gross margin was “buoyed by lower-than-anticipated promotional activity, overall strength in average order size, and better-than-expected leverage in freight and packaging,” according to Mr. Marte.

Chewy increased its guidance for the fiscal year as it opened a new automated fulfillment center in Nashville (its fourth overall) and prepares to expand into Canada.

“We’re not starting at ground zero in Canada, even though we’re not present in Canada. Our market awareness broadly sits in the mid-twenties. And even though that’s lower than obviously what we enjoy here in the United States, it’s worth noting that it’s not zero,” said Sumit Singh, Chewy CEO.

Mr. Singh believes that Chewy’s focus on service will be as welcomed by Canadians as it is by Americans. He said the pet products market is expected to grow slightly faster in Canada than in the U.S. over the next five years and that online sales penetration is slightly below the American market. Both of these point to opportunities for Chewy, he said.

The BrainTrust also had some thoughts on Chewy’s impending northward move and its chances for success.

“If Canadian customers are as devoted to their pets as we are in the states and if they value great customer service, great product quality and variety, and ‘order from the couch’ convenience, then Chewy should fare better than other retailers,” wrote John Lietsch, chief operating officer at Bloo Kanoo. “The assumption is that Chewy will be able to leverage its operational expertise and experience to continue to deliver the level of service and product quality that has endeared it to its U.S. customers and to do it at a competitive price.”

“Auto shipping based on a pet’s eating habits is a big convenience factor, and is part of the loyalty calculation. It is a service, one that makes feeding your pet that much easier,” wrote Mark Self, CEO of Vector Textiles. “They will experience the same if not higher level of success in Canada, count on it!”

Some noted that Chewy might even have some advantages in a market notoriously difficult to crack for American retailers.

“As a pure e-commerce retailer they will not have the brick-and-mortar challenges north of the border that so many other American retailers have faced,” wrote Mr. Seesel.

“As to Canada, by its geographic dispersal of population, it is easier – and less expensive – to reach more consumers via e-commerce than with sparsely located stores,” wrote Bob Amster, principal at Retail Technology Group.

If the retail industry doesn’t think Mother Earth wants to have a word, it only has to put its ear to the ground.

The consequences of epic weather events, including record-breaking droughts, floods and temperature fluctuations, are being recorded in shopper traffic and retail sales. And isn’t it ironic. The retail industry is a key contributor to global emissions; the apparel industry alone generates nearly 10% of global greenhouse gases, the European Parliament reports.

Now all that methane and carbon is polluting retail performances:

• Home Depot said cooler temperatures and wetter weather in parts of the western U.S., including California, had contributed to its biggest sales miss in more than 20 years – $1 billion, according to CNBC. The retailer had reported revenue of $37.3 billion in the first quarter, when analysts expected $38.3 billion.
• Sam’s Club this spring noted slower sales of patio sets, in part because shoppers are waiting later into the season to buy them, CEO Kathryn McLay said on a May investor’s call: “We also saw kind of cooler weather, which kind of changed the shape of how people are buying.” Walmart
  WMT
  , Sam’s parent company, also saw softer sales in seasonal lawn and garden products, due to “unseasonably cooler spring weather.”
• Fast-fashion chains, such as Zara, are especially vulnerable to unpredictable weather because of their fast-turning inventories. With seasons no longer clearly defined, consumers are making unexpected fashion choices – winter coats one day, T-shirts the next. Retailers in Europe, where torrential rains and droughts are becoming seasonal events, are striving to adjust, EuroNews reports.
• Supply chains also are affected. Due to “exceptional” droughts in Texas 2022, 70% of all cotton fields in key regions failed, according to The Texas Tribune. Monsoons in Pakistan last summer affected 40% of the country’s annual cotton yield, Vogue Business reports. And in August, China shut down factories due to a record-setting drought that halted economic activity, states the New York Times
  NYT
  .

Even Good Weather Can Disrupt Inventory

The effects of weather unpredictability go both ways. Unusually warm weather in January was credited with influencing higher-than-expected retail sales that month – 3.2%, according to CNN. But by March, U.S. retail sales declined by 1%, more than twice the 0.4% decline predicted (per USA Today).

These unexpected fluctuations, too, disrupt inventory and sales management – think out-of-stocks that cause customer frustration.

Sustaining Sales: 4 Guidelines For Retailers

A lot of retailers have adopted practices to reduce their own carbon footprints – a critical first step to improving weather-related fluctuations. Stores, including Walmart, Home Depot, CVS Health and Gap
GPS
, have appointed chief sustainability officers, for example.

Many of these companies have big-picture ambitions, such as halving food waste. Here are a few more tactical steps retailers can take, day-by-day, to better prepare for weather events.

Climate-change your analytics – Weather repeats itself from one year to the next just 15% of the time, the National Retail Federation reports, so retailers should not use last year’s weather to predict this year’s demand. Rather, they should incorporate weather forecasting data into their merchandising and marketing insights, to calculate the predicted effects of weather-driven demand. Analytics can, for example, isolate the extent to which a category’s sales volatility is weather-related (jewelry – weirdly – is much more susceptible to weather in January, when consumers use gift cards, NRF reports). This information can help retailers adjust not only inventories, but staff schedules.

Stop thinking of inventory as seasonal – When its 82 degrees in March and 40 degrees in May, consumers are likely keeping their winter clothes in the front of the closet longer and putting thoughts of swimsuits in the back drawers of their minds. Retailers can work with Mother Nature and invest in the tech that enables them to balance stock across stores. Some artificial intelligence software can achieve this by suggesting inter-store transfers before region-specific weather events occur – from overstocked northern locations to unseasonably cool southern locations within the fulfillment chain, for example (the retail predictive analytics firms Retalon and Snowflake are among providers).

Your supply chain should act as an umbrella – Just 11% of suppliers in the U.S., China and Taiwan are prepared for climate-related disruptions, according to a 2022 report in Supply Management. Retailers can require that their top suppliers map out their supply chains to show how well their lower-level fulfillers will come through during a weather event. Data technologies can further enable distributors to prepare for weather disruptions by using digital replicas to model various climate scenarios and outcomes. Lastly, retailers should lean on these partners to be better Earth stewards themselves; supply chains generate nearly 60% of global carbon emissions, Accenture
ACN
reports.

Use loyalty data to add wind to retail sales – Retailers can put their loyalty member insights to work by reviewing year-ago seasonal purchases and sending incentives to members to purchase weather-sensitive categories earlier. The data can inform both what members tend to buy annually, such as summer sandals, and less-frequent items, like outdoor furniture. The boating supply and equipment store West Marine, for example, uses geographic data generated from its loyalty program to target product offerings to members at varying times, regardless of month. This is because members in Florida are more likely to be saltwater boaters, so their season starts earlier than someone in say, Michigan, who is more likely to be a freshwater boater and has to wait for snow to melt and lakes to unfreeze before boating season can begin.

Speak Mother Earth’s Language, And She’ll Speak Yours

Catastrophic weather events are becoming as seasonal as farmer’s markets and snow skiing. The sooner the factors of these events, including how to cope with the aftermath, are entered into retail’s operational lexicon, the better prepared the industry will be to serve its customers. Consumers are, after all, also scrambling to find the goods they need in response to weather shifts.

The Earth is roaring. As anyone who’s lost a home after ignoring hurricane warnings will tell you, it pays to listen.

When Lululemon opened its first store in 1998 in the Kitsilano neighborhood of Vancouver the brand focused on creating product focused on the local community. Now, 25 years later, they continue to take that community-minded focus to a global footprint.

“The same unique foundation that got us here will continue to guide us in our next phase of growth,” says Celeste Burgoyne, Lululemon president of Americas and global guest innovation. “An obsession on product, a focus on human connection and looking for each and every opportunity to focus on community.”

Lululemon started as an idea, says Calvin McDonald, CEO, taking a fresh idea in women’s-focused activewear and building a community. The approach first resonated in Kitsilano and has since expanded to boast 650 stores in 18 countries.

Lululemon hit $1 billion in revenue in 2011 and reached $8 billion by 2022. A goal of $12.5 billion in sales by 2026 comes driven by three growth pillars, McDonald says. Lululemon’s focus is on product, looking to double the men’s business while growing women’s in double digits. They want to build deeper connections with consumers by doubling the ecommerce business while growing store sales in doubles digits. And they have aggressive international market expansion plans, with a goal to quadruple business while growing North America in double digits.

“We couldn’t be more excited to look back and celebrate where we came from and look forward to where we are going as a brand,” McDonald says.

Since opening in 1998, Lululemon expanded to the United States in 2003 and now has over 400 stores across North America. The expansion went global in 2004 by opening in Australia. Global growth continues with the brand opening its 100^th store in China in May, its first stores in Spain in 2023 and a soon-to-open first store in Thailand.

The brand takes a unique stance on product focus, using its own research lab at its Vancouver headquarters to highlight the “feel of science” on products. “We can make prototypes in house, we test on athletes and guest ambassadors in the intended environment and activity,” says Chantelle Murnaghan, vice president of research and product innovation. “We are iterating until we get those innovations exactly right. We talk about the science of feel a lot.”

That focus, she says, blends art and science to drive the brand toward new technical and functional construction and materials. “It pushes us to take a more sensory focus to what we are building,” Murnaghan says. “We are optimizing performance, but also enhancing our guest experience.”

With a continued growth focus, the brand’s 2022 entry into women’s performance footwear continues to expand in 2023, with more products expected moving forward. The brand is also highlighting updates in materials, such as the world’s first bio nylon 6 that can help the brand’s goal of textile-to-textile recycling.

For a brand intertwined with women—75% of the workforce is women, including over 70% of the leadership team—the sales strategy comes with dual prongs. Across North America, over 50% of the business is through digital channels, but McDonald says they remain “very committed to brick and mortar” as part of community connection.

Burgoyne says community events derive from stores, with an expectation of having one million guests participate in a community event in 2023 alone.

André Maestrini, executive vice president for international, says the brand grew the international business in 2022 by 35%. More is coming.

“We are a global brand, but a multi-local brand by creating these links with the community,” he says. “We are not a brand of big sporting events or signage, we are a brand of people that in their own way are going to inspire you, whatever your level is. This is a brand about human connections, a brand that is relevant in the markets we are in.”

“After 25 years,” Burgoyne says, “we really do believe we are just getting started.”

Chewy delivered another stellar performance, with sales up 14.7% for the first quarter and a gross margin of 28.4% compared to last year at 27.5%. Nearly 75% of sales came from the company’s auto-ship program, which continues to drive long-term customer loyalty. Chewy’s net sales per active customer grew almost 15% to over $500, and the company has plans to further its growth over the next year. In an interview with Chewy CEO Sumit Singh, he talked about brand growth focusing on customer experience and loyalty.

Preparing the business to scale

“When I took over as CEO in 2018, the company had just over $2 billion in sales, and our goal was to scale the business,” said Singh, who closed out the 2022 year with over $10 billion in annual revenue.

Singh’s background infused him with a deep knowledge of supply chain and logistics, and he has transformed the company regarding back-of-house operations. “We added a robust IT infrastructure, an ERP system, and focused four years ago on moving to cloud-based operations.” The enterprise resource planning software system (ERP) has been instrumental in automating many of the processes required to run a large-scale e-commerce business. Singh discussed how the business process, including outsourcing, in-house robotics, and automated workflow, has allowed Chewy to really scale in an impactful way. More efficient operations and resources invested in back-of-house have significantly impacted the bottom line, with profits up 20% year-over-year (YoY) for the first quarter.

Chewy’s digital transformation

The company made decisions several years ago to invest in the digitization of the supply chain, including adding in electronic data interchange (EDI) with vendors that allowed for more efficient purchasing and replenishment of products. Chewy uses sophisticated algorithms to predict demand and allocate product assortments across fulfillment centers. Through the use of automation, the company has been able to hire fewer buyers and planners even though the business has grown tremendously. “The headcount grew at half the rate that the revenue did, so we have become much more productive,” said Singh.

In 2020 when many companies were struggling to adapt to supply chain issues caused by the pandemic, Chewy had many processes in place which helped it survive the headwinds caused by the collapse of the global supply chain. “Advanced capabilities, using machine learning, complex algorithmic decisions of order routing, buying, and planning assortments, helped us survive the pandemic,” said Singh.

Automation is a big win

During the pandemic, the company opened its first fully automated fulfillment center and recently announced the opening of its fourth. The second-generation fully automated fulfillment centers have delivered a 60% improvement in ergonomics and safety, up to a 50% improvement in overall productivity, and about a 30% reduction in the overall cost of fulfillment.

Consumables and pet health drive revenue

The company experienced strength in the consumables and pet healthcare categories, representing 85% of revenue for the first quarter. Chewy did not see customers trading down despite current economic conditions in the U.S. market. The average order value was up compared to last year.

The company has prioritized pet insurance as a key offering, aiming to make pet healthcare more affordable and accessible for everyone. Chewy recently announced the official launch of Lemonade as part of the CarePlus suite of wellness and insurance offerings and which will join the existing provider, Trupanion
TRUP
. CarePlus plans are now available across various coverage options and price points. “The insurance vertical allows us to lower the barrier of entry into pet insurance for our customers in terms of quality and choice,” said Singh. Typically, services offer high margins, which is another benefit for Chewy.

North American pet insurance grows

According to the North American Pet Health Insurance Association (NAPHIA), pet health insurance premiums grew by 23.5% in 2022 compared to 2021. Over 5.4 million pets are insured across North America (a 21.7% increase from the 4.4 million pets insured in 2021). Rick Faucher, NAPHIA President and CEO/founder of Toto Pet Insurance, said the positive 2022 results are remarkable considering pet owners’ growing economic pressures last year, with rising food and energy costs and higher mortgage and loan interest rates.

Kristen Lynch, Executive Director of NAPHIA, added that continued increases in the number of insured pets are evidence of pet owners’ commitment to the health and well-being of their pets. “We know from various research studies that owners of insured pets are more likely to bring their pets in for regular shots, checkups, and emergency treatment, as well as to follow the recommendations of their veterinarian,” said Lynch. “With more than five million pets now insured across North America, it’s clear that more and more pet owners are viewing pet health insurance as an ideal way to ensure their pets are well cared for.”

International expansion later this year

Chewy will expand into Canada later this year and use existing infrastructure and processes to run its business internationally. The company decided to expand based on its insight that the growth of online purchasing behavior in Canada is similar to that in U.S. markets. The launch will be in the greater Toronto market, followed by gradual expansion into other Canadian markets.

Although other retail firms’ Canadian expansions have failed miserably (Target
TGT
, Nordstrom
JWN
), Singh was confident that the expansion model would work for Chewy. “We will approach the expansion into Canada with our eyes wide open and be humble. We are highly customer oriented, which will guide our decision-making,” said Singh. He discussed how the company has been studying the Canadian market for a long time and does not plan to just show up as an American company expecting the same results as the U.S. market. “We plan to stage the expansion and be deliberate with our decision as we learn the markets,” said Singh. The key to success, according to Singh, is by using the existing solid relationships they have and deploying a model of healthy collaboration in the new market.

The future of Chewy

The company expects its revenue to grow 10-12% in 2023 compared to 2022. Since over 75% of sales are delivered through a subscription program, it is unlikely that the company will include physical retail stores as part of its growth in the near future.

At BeautyMatter’s recent CEO summit, Bobbi Brown took to the stage with her top deputy, Cody Plofker. Plofker knows a little more than most about the company; he’s Brown’s son. Together, they spoke about building a modern-day heritage brand.

“We don’t do returns, it’s a very low percentage of sales. Usually, people find the right product. Alex: We follow the regulations. It’s well-understood by customers that we don’t sell data. It’s really part of using information to craft something unique for you.”

“It’s the same as when you go to a life coach,” said Sabrina. “You have to provide info to help us help you. We’re always giving you a choice.”

Brown said when she started her first company, she learned “exactly what to do and not to do. You had a very successful career in marketing,” she told Cody. “Everybody knows and loves my mom. The general manager called me and I started part time, then went full time.”

“You built a very loyal following,” said Kovack. “It’s so relevant and cross-generational. I feel like you’ve definitely pushed the boundaries. Having Cody, whom you trust helped.”

“I’m fearless,” Brown said. “Some things worked, and some didn’t. I try things. Foundationgate is not a myth. It happened. I called Cody a couple of hours later. I put the foundation on the TK and fueled sales. In two years the traction you’ve created.

“The two times we went viral, someone told me ‘You have to be on TikTok,” Cody said. “I thought we’d get like 10 people. The content was about Foundationgate. It was never a strategy. We were out of stock. We’ve been pretty good and don’t have many out of stocks anymore. Our mascara last year had a wait list. We have a launch on Monday. We make mistakes and figure out what to do.”

“My husband said, ‘Do you want a store,’ Brown said. “We have a very successful store in Montclair. We made a strategic decision not to go wholesale. We’re doing marketing outside brick & mortar.”

“I’m someone who was raised on magazines,” Brown said. “It’s definitely changed. I’m on the ‘Today Show.’ It doesn’t really move the needle the way it used to. There’s such an opportunity in physical retail that you get. A lot of brands don’t have the platform. I’m lucky, I came into this with a platform. We have no retail plans.”

“My background is in performance marketing,” Cody said. “For us, trying to drive customer acquisition online, a lot of that is based on social media. A lot of brands are going on TikTok. Now we know who our marketing is resonating with and we’ll do more.”

Brown said, “I tell all founders to breathe and pat yourself on the back. Appreciate what you’re doing. When you sell, it’s not going to be your company anymore. We’ll continue to open stores. We’ll open a few a year. We have lots of new products coming out and are trying to improve awareness.”

“We have experience,” the founder said. “Be positive and surround yourself with good people. Our creative director is 25 years old and she’s killing it. I want young people to learn from me. But I also want to learn from them.”

“I’m able to give Bobbie feedback,” said Cody. “Not that we’ve tried to go viral. TikTok makes it hard to predict. We’re looking to do more things with more staying power. Meta has done a very good job. YouTube is something we’re not using a lot yet, but we’re planning to. There’s definitely pros and cons.”

Brown sold her namesake company to Estee Lauder in TK. “They wanted me to sign a non-compete. I waited four years before starting Jones Road. I launched during the pandemic, when everybody said, ‘Don’t do it.’ I feel like it’s this playground for me. I love the beauty industry, I love people, and I’m having fun.”

Brown said she asked all her copywriter friends for ideas for a name. She was driving to the Hamptons and drove on Jones Road. “It sounded British and it was available,” she said.

Brown raised $150 million. “I started my entrepreneur journey when I started Markham,” she said. “In August 2020 that merger actually worked. It’s been a crazy pace. We bought brands and it’s been a really interesting journey. We acquired consumers organically. The big dream was to go from India to the world. We launched Baby Chakra, a baby brand.”

Jones Road was well-received in India, which is a very brand-poor country. “This creates an opportunity to launch a brand,” Brown said. “India is a very brand-friendly market. There are many points of similarities between India and the world’s brands. The Indian consumer is very value-conscious and interested in the environment. The second thing is, if you’re going to India, you have to respect the customer and who she is. For an international brand, it’s a very good market.”

“It’s a complicated market to penetrate from a regulatory standpoint,” Kovack said. “And it’s very price conscious. We have an omnichannel strategy. That’s something we’re able to target. India is omnichannel. Right now, shopping centers and area pharmacies carry our product and we have an online storefront. India is a huge opportunity. There are hundreds of languages spoken. You have to have a brick and mortar and digital strategy.”