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Rob McCourt

Beware of Dog…Chewy and BC Partners puts Executive Comp over shareholders.



Background

I have successfully traded Chewy over the years and re-entered at a price of $24.73 in Q3 of 2023. Re-entering was a mistake. Now the shares stand at $16.60/share down almost 33%.  In the words of Mark Twain - I am more concerned about the return of my money than the return on my money."


Why did I get back in?

My thesis was based on the following:

1)      Revenue growth was strong growing from $7.2 billion in FY 2021 to $11.0 billion in 2023.

2)      Gross margins were expanding - up 1.6pp since 2021.

3)      Pretax income and earnings per share turned positive in FY2023.

4)      No debt on the balance sheet and EBITDA was expanding.

5)      Short interest was 20-25% of the float (not shares outstanding)

6)      The 52-week high was $51.87/share and analysts had rated the firm a buy.


What is happened?

Now the rate of revenue growth has slowed to 10% on a TTM basis. Analysts are now forecasting future revenue growth to decelerate to 5% in FY 2025. Margin improvement and earnings have stalled. There appears to be no sense of urgency from management to address profitability or shareholder value. I have listened to the last 3 earnings calls which validated this point based on my prior executive management experience. Please do the same.


Meanwhile share-based compensation continues to accelerate despite these lackluster results. Over the last 4 years share based compensation was $592 million or $148 million. The company lost $30 million in Net Income during that same period and shareholder value is down over 60% during that same time frame. The CEO is still employed, and his compensation remains intact. The CFO did retire.


What did I miss? Governance!

There are 12 Board members of which 7 members are from BC Partners. BC Partners controls the Board and approximately 80% of the shares. BC Partners and the current CEO took Chewy public.  So, until the limited partners of BC Partners demand some "share-based compensation" from the General Partner; there will be not a change in strategy or management.


Projections and valuation

My current forecast still has earnings growing from $.10/share in FY 2024 to $1.18/share in FY 2027. However, applying a market multiple versus a growth multiple given the declining revenue growth rate, the value of the shares are still overvalued based on the current management. I see the current intrinsic value at $9-$11/share and $18-24/share by FY 2027. Basically, dead money unless BC Partners gets real with management.


So where do I go from here?

I plan to hold the shares in 2024 under the belief that limited partners will be seeking liquidity and pressure the general partner to wake up.  I will be listening for the company to moderate expenses, gain a sense of urgency on shareholder value, and a reduction in share-based compensation as key metrics to continue with this investment. Otherwise, I will tax loss harvest this fall. Below is my financial analysis.



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