Chewy (Ticker: CHWY) - Revisited
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
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. 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. Chewy benefited from pandemic related pet boom and now with those pets staying in households we will see if Chewy will remain growing.
Quantitative Analysis
At the time of this writing (4/24/2022), CHWY is trading at $34.62 with a 52 week range of $34.48 - $97.74 and a market cap of $14.56B. In Q4 of 2021 CHWY’s net sales were $2.39 billion up 17% YoY, gross margin was 25.4% which decreased 170 basis points YoY and net loss was $63.6 including share-based compensation expense of $15.8 million. Return of equity (ROE: Net Income / Total Equity *100) of CHWY is -131.33% and net margin (net income / revenue) is -0.83%. The price to earnings (price per share / earnings per share) ratio was -195.97 and the debt to equities ratio (total liabilities / total equity) is 140.58. This financial analysis was done using financialstockdata.com (sign up using our promo code GCI here). You can view CHWY’s Q1 2022 earnings here and their 2021 Annual Report here.
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Bullish Thesis
Here are three points to support the bullish thesis updates:
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. This still holds true but with seemingly a looming recession it won’t matter the number of products Chewy can offer if pet spending is decreased.
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. These pets are still around and people are still scooping up pets with remote work increasing in popularity. These pets will always require care and supplies which Chewy offers. It will benefit for the near future because of the pandemic pets, Chewy will just need to keep increasing marketshare.
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! Net sales keep increasing therefore it seems that the user base for Chewy is growing. The convenience of Chewy will allow it to keep growing, but with services like Amazon and PetSmart offering online orders with most products that Chewy offers, it will be difficult for Chewy to continue to grow in my opinion.
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? I think this is now closer than when I originally wrote this. More money has been printed and it seems we are within a few quarters before this takes a turn for the worst.
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. Competition will always be a problem and will continue to be an issue. Increased competition, more companies distributing pet supplies, and more options for people to purchase supplies for their pets.
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. This is a continuing trend. More people getting away from autoship sales and moving towards purchasing on an as needed basis. This will continue in my opinion and will make it more difficult for Chewy to have reliable revenue.
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Brandon
Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I 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 is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.