Chewy (NYSE: CHWY) has experienced a tumultuous period with notable volatility in its stock, particularly over the past five years, where the majority of the performance has been unfavorable for shareholders. The pet supply giant briefly enjoyed favor on Wall Street as e-commerce surged during the initial phases of the pandemic, but the stock faced a reversal once the growth momentum waned.
Over the past five years, Chewy’s stock has declined by more than 80%, following a 70% increase through early 2021. However, investing is inherently forward-looking, and the outlook appears promising for this e-commerce specialist. Chewy stands a good chance of expanding its sales presence while concurrently enhancing its business efficiency.
Mixed results
Chewy is currently navigating through challenging conditions in its business. The pace of sales growth has considerably slowed, with revenue increasing by just 8% in the most recent quarter. Notably, the company was experiencing growth rates exceeding 20% not too long ago. Additionally, Chewy has observed a contraction in its active user base over the past year, posing a challenge to its identity as a growth-oriented business.
The pet food industry, to which Chewy belongs, has undergone unusual dynamics in recent times. The pandemic accelerated some of Chewy’s growth by prompting pet owners to adopt its delivery model. However, the broader outlook for the pet supply segment hasn’t fundamentally shifted. Projections indicate the industry is set to grow at a rate between 5% and 7% annually over the next several years, a decline from the 10% growth seen during the pandemic and the 6% in the pre-pandemic era. Chewy’s primary hurdle will be to continue gaining market share amid this slowdown in the industry over the next few years.
Reasons for optimism
Chewy’s future growth trajectory will largely hinge on its established U.S. retail market, complemented by its newer pet healthcare business and the strategic entry into international markets, beginning with Canada. The potential for enhanced investment returns will be more promising if the company can synchronize an upswing in average spending per customer with a concurrent expansion of its customer base. Although Chewy is currently facing a challenge in the latter aspect, with a declining active user pool, its encouraging average annual spending per customer surpasses $500.
Financially, Chewy is in a robust position, providing management with the flexibility to make aggressive investments in growth initiatives. The company boasts a strong and ascending gross profit margin, positive cash flow, and a modest net profit over the past nine months. However, the consensus on Wall Street is likely to favor Chewy more if it can navigate towards achieving double-digit percentage profit margins.
What to watch in late March
Investors are eagerly awaiting Chewy’s fiscal fourth-quarter results, scheduled for release in late March, to gain insights into the company’s short-term growth prospects. Analysts anticipate a 10% sales increase for fiscal 2023, with a projected slowdown to around 5% gains in the ongoing fiscal year. The earnings outlook appears slightly more optimistic.
Despite Chewy’s stock experiencing a 60% decline in the last year and trading at a discounted valuation, the outlook for shareholder returns over the next five years seems less promising. However, even modest improvements in profitability and growth could potentially boost the stock. For Chewy to regain favor on Wall Street, there will likely need to be fundamental shifts in its engagement trends, and investors are hopeful that the upcoming March 20 earnings update might mark the beginning of such a positive trajectory.
