Shares of Chewy.com (CHWY) are higher in morning trading ahead of this week's post-IPO lockup period expiration, which comes in conjunction with stronger than expected revenue for its fiscal third quarter.
IPO LOCKUP EXPIRATION THIS WEEK: Chewy's post-IPO lockup period expires on Wednesday, offering company insiders the first opportunity to sell their stock. Chewy went public June 14, pricing its IPO at $22 a share.
JPMorgan analyst Doug Anmuth told investors in a research note on Tuesday that he expects 348M shares to unlock, including 267M PetSmart shares, 79M BC Partners shares, and 2.7M management restricted stock units vested at the IPO. No new information around BC's and PetSmart's plans was learned on the earnings call, Anmuth wrote, adding that he continues to expect both to sell down their Chewy stake over time.
Chewy's current float is 53M shares, with unlocked shares representing 87% of the shares outstanding, Anmuth noted. Given that PetSmart and BC Partners are affiliates, he said that unless a registration statement is filed, their shares are subject to Rule 144 volume restrictions, or a maximum of 11M shares sold within a three-month period.
EARNINGS: On Monday after the market close, Chewy reported a third quarter loss per share of (20c), missing the (16c) analysts were expecting. Revenue for the quarter of $1.23B, however, slightly exceeded the $1.2B consensus. The company's gross margin in Q3 was up 410 basis points to 23.7%, it said, with active customers up 32.8% to 12.7M and net sales per customer up 11.4% to $360. Looking ahead, Chewy forecast fourth quarter revenue of $1.33B-$1.35B, against analysts' estimates of $1.33B. It also sees fiscal 2019 revenue of $4.82B-$4.84B, against analysts' estimates of $4.8B.
On a conference call discussing its quarterly results, CEO Sumit Singh said he believes "that there is significant market opportunity ahead of us and remain focused on our strategy of sustainable top-line growth at scale and margin expansion." The executive added that "recent investments in both private brands and chewy pharmacy, two pillars of our growth and margin strategy, contributed positively to both our year-over-year increase in net sales and gross margin expansion in the quarter."
ANALYST COMMENTARY: Following the earnings report, RBC Capital analyst Mark Mahaney raised his price target on Chewy to $38 from $37 and noted that the fundamentals on the company were neutral, with modest deceleration in revenue against "solid" expansion in gross margins. Mahaney kept his Sector Perform rating on the stock, but stated that he would be "more constructive" if Chewy's newer initiatives become "more material" and as the company laps the December 11 lockup expiration.
Meanwhile, Morgan Stanley analyst Lauren Cassel said Chewy's Q3 results "highlight the consistency of the business" and she raised her 2019 EBITDA estimate by $10M following the report, adding that her unchanged 2020 and 2021 estimates are "potentially conservative" in light of this past quarter's results. While she "respects the nervousness" of investors worried about Wednesday's lock-up expiration and the "assumed impending secondary" offering they think could potentially come as soon as this week, Cassel said that such an offering, if one comes, should act as a clearing event. The analyst added that she would view any short-term pullback as a buying opportunity.
JPMorgan's Anmuth said he believes Chewy continues to execute well in its first year as a public company. He added that he believes Chewy's holiday sales are off to a strong start with Cyber Monday representing its biggest shopping day in history and a "stable" competitive environment, which he suggested is a positive sign for fourth quarter gross margin.
PRICE ACTION: In morning trading, shares of Chewy.com are fractionally higher to $24.22.
Chewy
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