Chewy Inc. (Ticker: CHWY) - Brief Breakdown

In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.

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Company Description

Chewy, Inc is an e-commerce business that provides pet food, treats, pet supplies, pet medications, and other pet-health products for dogs, cats, fish, birds, small pets, horses, and reptiles. Chewy uses its retail website to provide its services and was acquired by PetSmart for $3.35 billion, which was the largest ever acquisition of an e-commerce business at the time. PetSmart and Chewy have since split (October 2020) but both remained owned by BC Partners. CHWY offers approximately 60,000 products from 2,000 partner brands and is one of the largest online pet retailers in the US.

Quantitative Analysis

At the time of this writing (10/3/2021), CHWY is trading at $67.69 with a 52 week range of $55.81 - $120.00 and a market cap of $28.15B. In Q2 of their fiscal year 2021, CHWY’s net sales grew 26.8% to $2.16 billion. Chewy’s gross margin of 27.5% expanded 200 basis points year over year. Return of equity (ROE: Net Income / Total Equity *100) of CHWY is 201.04% and net margin (net income / revenue) is 0.53%. The price to earnings (price per share / earnings per share) ratio was 2930 and the debt to equities ratio (total liabilities / total equity) is 25.89. This financial analysis was done using (become a beta tester here). You can view CHWY’s 2021 Q2 earnings here and their 2020 Annual Report  here

Qualitative Analysis

Chewy has become one of the leaders in e-commerce for all things pet related. With the increase in pet ownership due to the pandemic, Chewy was primed for growth. In 2020 the number of active customers grew by 42.7% although total sales slightly declined by ~1% but net sales per customer has grown by 3%. Chewy is the only online service that offers delivery of medication for pets through an online retail service and offers services for multiple animals while many competitors have subscription boxes for specific animals. Chewy’s diversification of various products for multiple animals which allows Chewy to profit off of all pet needs. There is also an increase in pet ownership rising up to 70% of US households and US households spent 11% more on their pets throughout that time which seems to have good sentiment with Chewy going forward.

Bullish Thesis 

Here are three points to support the bullish thesis:

  • The Amazon of pet supplies: Chewy offers a wide array of pet supplies, including toys, food and treats, grooming supplies, pharmacy products, clothing and accessories, bedding, crates and pens, and much more. They offer products for both common household pets (dogs, cats, fish, reptiles) and farm animals (cows, goats, sheep, horses, pigs). In other words - Chewy truly offers a one-stop virtual shop for pet supplies. From personal experience, I can say that Chewy is a fast, reliable, and often cheaper (particularly for their pharmacy) way to purchase pet supplies, and you can do it from the comfort of your living room.  

  • Pandemic pet frenzy: Last October the American Pet Product Association reported that 11.38M U.S. households had welcomed a new pet during the pandemic. In August of 2020 TD Ameritrade found that 33% of Americans were considering purchasing a new pet. Their report also found that, on average, dog owners spend ~$1,200 per year and cat owners spend ~$680 per year on things like food, grooming, and veterinary supplies. As you’ll read below, Chewy has done a great job onboarding many of these new pet owners. I, like many others, adopted my first pet during the pandemic - a beautiful catahoula leopard dog named Amy. 

  • Growing user base: Despite a slight decline in autoship sales in 2020 (discussed in more detail below), Chewy’s active user base is growing rapidly. From 2019 to 2020, Chewy’s active customers increased by nearly 43%. Further, net sales per active customer increased by ~3% over the same time period. Although I’d like to see more of their new customers become autoship (as a sign of Chewy’s stickiness), I still think their user base growth is phenomenal. If Chewy can continue to onboard new customers and sell them more products, expect their value to rise. One of those new customers is our other company dog, Max!

Bearish Thesis

Here are three points to support the bearish thesis:

  • Potential Economic Downturn: Generally during an economic downturn, consumers look to cut spending in unnecessary places. Although we all love our furry friends, it is difficult to justify spending for pets when the cost of goods and services are increasing at an alarming rate. The inflation rates and continually money printing that we have highlighted in our various Twitter threads (so be sure to give us a follow here) lead to a potential economic downturn as the unemployment rates have not gotten back to pre-pandemic levels and the wealth gap is rapidly increasing. These signs point to an economic downturn, but the question is when will this occur? 

  • Subscription Pet Box Competition: Due to the increase in pet ownership described above there is a need for more pet services and various pet subscription boxes are now popping up on the market. The benefit of Chewy being diversified with various pets and products is beneficial but that leaves room for smaller companies specializing in certain pets and products, like Bark Box. These smaller companies can take business away from Chewy as Chewy is not necessarily specialize and it leaves room for innovation for specific pets. For example, Bark Box has various toughness of toys and options for their subscription service and can become more specialized while focusing only on dogs, while Chewy has such a broad range of products it is more difficult to specialize. 

  • Autoship Sales Declining: According to Seeking Alpha, autoship sales as a percentage of total sales have declined by ~1% in 2020 compared to 2019 to 68.4% of the overall total sales of Chewy. This can be viewed as a sign of Chewy potentially losing its stickiness as more consumers and customers came into the market for Chewy but fewer elected to get subscription services. Subscription businesses have consistent revenue coming in monthly, but if Chewy cannot gain more subscribers, the purchases will vary over time making it difficult to anticipate the variability of purchases. 

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If you’re new to stock investing, check out our introduction to stock investing series:

  1. What is Investing and Why Should I Do it?

  2. How to get Started in Stock Investing

  3. Stock Investing Basics

  4. Overview of Stock Investing Strategies

  5. How to Develop a Thesis for a Company

  6. When to Sell a Stock

Have a great week everyone, 

Brandon & Daniel 

Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.