Margin Talks Report Card: What Chewy's Numbers Tell Other DTC Brands

Intro: EBITDA calculations are important, but could be misleading. Top-line revenue walks, but margins talk. Welcome to the first edition of Margin Talks, Finaloop's new series where we dive deep into the financial metrics that matter most for DTC brands. In each installment, we'll analyze a prominent DTC company's margins to extract valuable insights for founders and operators.

For today’s analysis, we're examining Chewy - a brand that revolutionized the pet food and supply industry and became a real ecommerce market leader. With a current market cap of approximately $12.7B and annual revenue of $11.4B, Chewy is a behemoth in the retail pet space.

The pet space in of itself is super interesting, as per the Bureau of Economic Analysis, Americans spend $186B in 2023 on their pets, surpassing childcare expenditures. Whatever you think about this, examining one of the leaders in this wildly growing industry is definitely worthwhile.

Despite their status as a market leader (around ⅓ of the pet market share), and perhaps because of the decrease of their share value since their IPO (although the trend has overall been positive year to date), Chewy has not been stagnant, and is constantly embarking on new strategic initiatives, including expansion into Canada, expanding vet clinics, improvement of automation and new membership programs.

Today, we're digging into their margins to see what's working, what's not, and what small brands can learn from their story.

But why focus on margins? See full explanation in our first two reports cards:

Warby Parker | Kohl's

Okay, ready? Let's dive right in.

The DTC Margins Report Card

1) Gross Margin

Grade: B+

Definition:

Revenue minus the cost of goods sold (COGS), expressed as a percentage of revenue. Indicates how efficiently the company produces and prices its products.

Chewy's Numbers:

Per Chewy's Q3 numbers, their gross margin is just about 29.3% (which means that their COGS are approximately 70.07%).

Quick Analysis:

Chewy's gross margin has slightly improved vs comparable numbers from 2023 (when COGS were 71.5%), showcasing the low margin business model. Drivers to growing the business were the growing sponsored ad business + sales of premiums within consumables and health. YoY revenue growth was approximately 4.8%, which is considered modest. Chewy’s base of active customers has actually decreased over time, but the AOV has risen sharply (from $434 to $567). 

New lines of business, such as expansion into vet clinics, which are higher margin, may drive growth of topline revenue.

Takeaway for DTCs:

When operating in lines of business with relatively low margins, increasing recurring revenue (via memberships) and LTV is the name of the game, as well as preventing customer churn. In addition, expansion into new markets, especially when they have higher profit margins, while keeping your operating costs relatively stable can definitely drive top line growth, increase gross profits as well as operating profits.

2) Operating Margin

Grade: B

Definition:

Operating income as a percentage of revenue. Reflects how efficiently the company manages its operating expenses like marketing, rent, and salaries.

Chewy's Numbers:

0.9% 

Quick Analysis:

Non-adjusted SG&A equal 21.5% of sales (adjusted - 19%), compared to 22.3% during last year’s comparable period, driven primarily by discipline with respect to payroll and fulfillment, and utilizing automation.

Advertising and marketing costs equaled 6.7% of net sales, as opposed to last year’s 6.5%, although management expects an increase in marketing costs in Q4, driving these costs to similar levels as last year, due to marketing campaigns.

Slightly better SG&A, with similar marketing and advertising costs, lead to slightly better numbers (which pushes Chewy into profitable territory) this quarter and year to date.

Takeaway for DTCs:

We’ve said this before, and we’ll say it again - when your gross margin is razor thin, you need to both increase volume and keep your operating costs lean and fixed (and preferably reduce them) in order to drive operating margin profitability. 

3) Net Margin

Grade: B-

Definition:

Net income as a percentage of revenue. Reflects profitability after all expenses, taxes, and interest.

Chewy's Numbers:

0.1% (net income of $3.9M)

Quick Analysis:

This is a slight improvement over the comparable period, which was in loss position, and assuming projected growth for 2025, these numbers aren’t terrible. As noted, when you have very significant COGS, and opex which is not low, it doesn’t leave too much wiggle room in the net margin department. Moving into new markets along with higher margin products, while keeping Opex stable, can drive up gross, operating and net margins.

Takeaway for DTCs:

There is no magic formula here - bottom line in companies with thin gross margins is tough. Short term investment in Capex and automation can lead to long term decrease of opex, which can drive up margins.

4) EBITDA Margin

Grade: B

Definition:

Earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. Often used to measure core operational profitability.

Chewy's Numbers:

Adjusted EBITDA margin of 4.8% (increase of 1.8% over comparable period)

Quick Analysis:

It is worth keeping in mind that the adjusted EBITDA (which becomes 4.8% positive) is mainly due to adjustment of stock-based compensation (which isn't cash, but dilutes investors), and depreciation and amortization - which is a significant expense for Chewy, so this kind of adjustment, and measure, should be taken with a grain of salt.

In general, the improvement in adjusted EBITDA is primarily driven by improvements in gross margin and operating costs

Takeaway for DTCs:

EBITDA really is the market gold standard for comparisons between companies, you should strive for EBITDA margins above 10-15%. However, beware adjusted EBITDA calculations and make sure you are comparing apples to apples.

Chewy's Overall Grade: B

While Chewy's numbers have improved based on their Q3 financials, they still need to show how they will significantly expand sales while keeping operating expenses constant, mainly based on expansion to new and more profitable markets.

Key Takeaways:

• When in low margin markets, volume, LTV and preventing churn, are the name of the game.
• Stabilize or even decrease Opex using automation and consider Capex expansion, which may hurt cash flow short term but can improve COGS and operating costs.
• Expanding into higher margin markets using your current operating setup can yield good results.

Summing it up

Chewy's story shows that even the biggest names in DTC face financial challenges. But with a closer look at your own margins, you can set your brand up for sustainable growth—without the big brand headaches.

Want to know your own margins and where to improve? Finaloop makes it easy for DTC founders to track profitability and plan for growth.