Good news for Chewy: Petco says customers don’t care about higher prices

ohonline pet retailer soft (NYSE: CHWY) I had good news from a rival Petco (NASDAQ: OUF) in November. Petco released fiscal third quarter results which showed healthy revenue growth. But that’s not the only good sign that Chewy has achieved financial results from its competitor.

The biggest news came from Petco’s conference call following the announcement of its results. During the discussion, Petco’s management pointed out that it has increased the prices of several of its products, and customers have not shied away from the increases. Let’s see why this is good news for Chewy stocks.

Image source: Getty Images.

Customers respond relatively well to higher prices

Typically, when a business raises its prices, consumers buy less of a product. However, what is also important is the magnitude of this inverse relationship between price and sales. Some products, which are generally non-essential, will see their sales fall further when their prices rise. In contrast, basic commodities that people need every day, such as essential foods, experience much smaller sales decline when prices rise. These products are known as “inelastic” products.

So what happened in Petco’s last quarter? Like many other businesses, it has experienced increased input costs due to supply chain disruptions. It therefore had to decide whether it should absorb these costs or pass them on to the customer by increasing the prices of its products. During the quarterly conference call, Petco’s CFO Brian LaRose discussed his company’s approach to alleviating these inflationary pressures:

“Regarding inflation, we have taken some pricing action to offset increases in input costs. Our pricing strategy was executed methodically. And overall, we didn’t see any impact on the units. We have an inelastic category and flexibility to adjust our prices as market dynamics unfold.

In other words, Petco raised the prices of some of its products and consumers did not significantly reduce the quantities they bought.

Why this is good news for Chewy

Petco and Chewy sell similar products and are similar in size when measured by revenue. In its most recent quarter ended October 30, Petco reported sales of $ 1.4 billion. In the fiscal second quarter ended August 1, Chewy reported sales of $ 2.2 billion. Like Petco, Chewy also faces rising input costs due to supply chain challenges and higher marketing prices.

The latest pricing news for Petco’s products could give Chewy more confidence to institute its own price increases and expect customers to respond in the same way. This will undoubtedly help the company maintain its impressive profit margin. From 2016 to 2021, Chewy’s gross profit margin increased from 16.6% to 25.5%.

Good for Investors in Chewy and Petco

Of course, the fact that Petco has raised prices and hasn’t lost a lot of customer orders is good for shareholders. Alternatively, the two companies could have absorbed higher input costs rather than passed them on to customers, which could have reduced the profit margins of both companies and made them less attractive for investment.

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Parkev Tatevosian owns shares of Chewy, Inc. The Motley Fool owns and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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