Chewy’s Stock Is Up 55%, What’s Next?

Chewy’s stock (NYSE: CHWY) has experienced a notable 55% surge in the last year to around $33 (Dec 18), garnering significant investor attention. Chewy’s stock has plummeted 72% from its February 2021 peak of approximately $120 and currently trades at a level similar to its June 2019 initial public offering price ($35). The pandemic sparked a significant increase in pet adoptions, which subsequently returned to below-average growth rates over the last three years. That said, Chewy has reported an encouraging uptick in pet adoption rates of late, driven by a steady increase in its customer base on a quarter-over-quarter basis, as well as sustained growth in sales per active customer in the recent Q3. Chewy also issued an upbeat revenue forecast for the fourth quarter, anticipating a significant acceleration in growth. We discuss this further below.

The company projects Q4 sales to increase by approximately 13%, reaching a range of $3.12 billion to $3.18 billion – as it prioritizes adding new customers. Concurrently, Chewy has revised its full-year guidance, now expecting sales to range from $11.84 billion to $11.88 billion, representing 6% growth. This upward revision surpasses the company’s previous guidance, which anticipated revenue growth of 3% to 4%. Furthermore, Chewy has raised its full-year adjusted EBITDA margin guidance to a range of 4.6% to 4.8%, exceeding its prior outlook of 4.5% to 4.7%. The company’s business model allows it to automate the shipping of basics like food to households with pets, which make up nearly 80% of Chewy’s total net sales. That said, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Chewy’s fiscal third-quarter (ended Oct) grew 5% year-over-year (y-o-y) to $2.9 billion. This marked an improvement from the 3% sales growth reported in both Q1 and Q2. The revenue was driven by a 9% surge in Autoship sales, which reached $2.4 billion. Net sales per active customer also rose 4% y-o-y to $567. Although the company experienced a year-over-year decline of 100k active customers, it added 200k new active customers during the quarter. Gross margin expanded 80 basis points y-o-y to 29.3%, while selling, general, and administrative expenses as % of revenues decreased by 50 basis points. Consequently, the company’s adjusted earnings per share climbed 33% y-o-y to $0.20. In addition, its adjusted EBITDA soared 66% y-o-y to $138 million. Chewy’s free cash flow grew three times y-o-y to $152 million and it ended the quarter with $507 million in cash and marketable securities and no debt.

Notably, CHWY stock has performed worse than the broader market in each of the last 3 years. Returns for the stock were -34% in 2021, -37% in 2022, and -36% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Chewy sells food and supplies for a variety of pets – dogs, cats, fish, birds, small pets, horses, and reptiles. The company also deals with new pet industry categories like personalized products, pet insurance, and a pet telehealth offering – where pet owners can schedule a visit with a veterinarian over a phone or video conference.