Investors initially put Chewy (NYSE: CHWY) stock in the doghouse after the company’s late-March earnings report. While sales expanded at a decent pace for most of 2022, and earnings trends were strong, the pet supply specialist lost customers in Q4 and for the wider fiscal year. That slump raised fears that growth will be harder to achieve in 2023 and beyond.
But there are good reasons to believe the worries are overblown. Let’s look at a few reasons why Chewy stock still looks attractive right now.
The bad news for Chewy
The major concern for the business is that Chewy is losing customers. Its base of active shoppers fell 1% year over year in Q4 and for the full 2022 year. That metric alone was a key reason why share prices fell in the immediate aftermath of management’s earnings announcement. Chewy needs to keep gaining customers if it’s going to dramatically expand its sales footprint.
Look closer and you’ll see cause for optimism, though. Chewy raised prices significantly in 2022 in response to rising costs. This shift contributed to a 15% increase in average annual spending by customers, up to $495 per year. And the company still improved its percentage of sales that come from its subscription service to 73% of sales from 70% a year earlier.
These wins, plus Chewy’s ability to win market share in 2022, suggest the growth thesis is still intact.
Financial success
Investors don’t have to be concerned about Chewy’s finances, either. Gross profit margin improved to 28% of sales last year from 27% in 2021. The company is profitable, and its $119 million of free cash flow in 2022 marked a roughly 100% increase year over year.
The business is also well positioned to weather a recession, should one develop. Chewy competes in an industry that’s resistant to consumer spending pullbacks, as people tend to shift brands on pet food and supplies only rarely.
And almost all of its sales are in the nondiscretionary categories that include food and healthcare. Chewy already demonstrated in 2022 that it can generate solid profits even during times when spending is declining on discretionary products like toys.
Outlook and valuation
The prospects for long-term growth remain excellent. Chewy is pushing into international markets this year, for example. It is building a bigger presence in healthcare, nutrition, insurance, and advertising, which gives the company a widening share of a huge addressable market. “We continue to see significant whitespace for expansion,” executives told investors in mid-March.
Yet Wall Street’s short-term growth concerns have pushed the stock’s valuation down to below 2 times sales. Chewy was valued at 4 times sales as recently as late 2022.
It is true that economic trends have weakened since then. And enthusiasm on Wall Street has faded for many growth stocks, which look risky as we approach a potential recession. Chewy doesn’t fit well in that risky category, given its positive earnings and cash flow. That’s why investors should take a closer look at the e-commerce specialist and consider adding the stock to their portfolios.
10 stocks we like better than Chewy
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Chewy wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
See the 10 stocks
*Stock Advisor returns as of March 8, 2023
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
