Pet retailers, like many other essentials-based retailers outside of Walmart, are having a difficult year. Recall that the pandemic injected a more economically fragile consumer into the category, with 23M households adopting a pet during this time. Many of these households were lower-income households, so high inflation in both human and pet food put added pressure on these households. As things now stand, pet households are trending flattish year-over-years, but the rate of pet households to overall households remains depressed per Chewy management.
Separately, the category has experienced a contraction in its high-margin general merchandise (toys and the like) because of cheap competition from marketplaces like Temu and others. This erosion in sales mix is what has also hit mass and dollar stores. Another challenge is that pet retailers are seeing the same K-shaped recovery as other retail and restaurant categories, with premium banners like Chuck & Dons and Woof Gang Bakery producing large year-over-year visit gains, whereas traditional retailers like Petco and PetSmart seem stuck.
Earlier this week, Petco reported stable fiscal Q2 2024 sales and profits. incoming Petco CEO Joel Anderson (previously at Five Below) shared why he chose the role at Petco, “There are 3 things about Petco that excite me. Number one, our integrated store and digital footprint, which have positioned effectively and create an incredible customer experience brought to life across multiple channels. My initial visits have already exposed me to some of the most knowledgeable and enthusiastic people I've met in retail. I must say our partners in the pet care centers truly care about our customers' pets. I've been impressed. Number two, delivering a differentiated offering that can bring and make Petco a destination for pets and pet parents. It's a truism I've seen through my decades in retail that if we present our customers with unique and trend-right product, we'll accelerate our return to retail excellence, meaning pet parent needs and getting back to the heart and soul of pet parenting. Number three, our breadth of services offering, including our vet platform. This is our biggest competitive distinction from online-only and mass players and has the potential to power our business as a significant long-term growth driver.” In discussing his strategy with the business, it is to essentially “nail it” on the details. We’ve written lately about how success in retail is getting the details right. And so, we’ve one more brand to watch for improved execution, and especially assortment. If they do that, we’d expect to see and improvement in their frequency metrics. Favorably for Petco, the loyalty metrics have been going in the right direction compared to peers.
Below, we've also presented visitation activity for Chewy’s fulfillment centers. Activity is down 10% year-over-year, but efficiency is up with dollar revenue per shift up +19% for Q2 2024.
On a reported basis, Chewy drove +3% revenue growth on a 3% decline in SG&A. EBITDA margin for the first half of 2024 was a record 5.3% compared to 3% in the prior year. Chewy has been driving efficiency to push to generate more EBITDA and cash flow and one place for significant savings is in its fulfillment costs. Over the past year, it closed one fulfillment center, and it drove greater efficiency on 8 of the remaining 15. Also driving fulfillment center efficiency is automation with CEO Sumit Singh saying, “Over 40% of order volume is now benefiting from automation, and our proprietary supply chain software is enabling us to place inventory more optimally across our fulfillment center network, thus, leading to both lower fulfillment cost and an improved customer experience.”
Looking at individual markets, the declining activity for its fulfillment center in Arizona suggests that this is a market where Chewy has greater competitive challenges. This location has been on a downward trend since mid-2022 and the year-over-year shift activity this August decreased -22%.
The chart below shows that Petco stores in Arizona are outperforming nationwide averages in terms of traffic growth; that may indicate one reason why Chewy’s Arizona fulfillment center is struggling.
