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Fearing a Second Coronavirus Wave? Buy This Growth Stock

By Harsh Chauhan - Updated Jun 15, 2020 at 8:19AM

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The COVID-19 outbreak has led to a surge in this online retailer's business.

Fears of a second wave of COVID-19 in the U.S. and doubts about a potential economic recovery led to a huge correction in the major indices on June last week.

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite fell big time. Volatility spiked as a surge in hospitalizations in 12 states has given Wall Street fresh cause for concern. A second wave of novel coronavirus infections could lead to a halt in economic activity once again and may result in a rerun of the huge stock market correction we saw in March.

Amid this looming uncertainty of a second wave, there are a few companies worth looking at right now as COVID-19 has turned out to be a tailwind for their businesses. Chewy (CHWY 1.17%) is one such stock that has delivered terrific gains this year, beating the broader market handsomely.

CHWY Chart

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COVID-19 is driving more customers toward Chewy

Chewy's latest quarterly results are proof that more American pet parents are shifting their spending online. The company saw a 46% year-over-year spike in fiscal 2020 first-quarter revenue to $1.62 billion, easily eclipsing the Wall Street estimate of $1.53 billion.

The company ended the quarter with 15 million active customers, an addition of 3.7 million customers from the prior-year period. In fact, the 32.6% year-over-year growth in Chewy's active customer base was the "fastest acceleration of new customer acquisition in the company's history," according to comments from CEO Sumit Singh on the latest earnings conference call.

Person pressing buy button on a keyboard.

Image Source: Getty Images.

What's more, Chewy customers are spending more money with the company. Its net sales per active customer increased 6.6% from the prior-year period to $357. Other good news for Chewy investors is that a company survey shows a shift in consumer behavior to online purchasing of pet products in the wake of the pandemic.

The value of initial orders placed by consumers who entered Chewy's fold in the post-lockdown period (March and April) was higher by 11% as compared to orders placed by new customers acquired in months prior.

Additionally, Singh noted that "a higher percentage of our new customers returned to make a second purchase" within the first month of their initial purchase, and "the average value of those repeat orders was as much as 5% higher than the pre-COVID customers."

Yet another positive for Chewy was the reactivation of its existing but idle customers. In the first quarter, the number of existing customers who became active once again was nearly double compared to previous quarters. Chewy classifies a customer as inactive if they have not made a purchase in the past year.

The company could see these positive trends continue in the coming months if the pandemic rears its ugly head once again in the U.S. Pet parents will stock up on food and other supplies as they did before, relying on online channels for their purchases to avoid going to crowded brick-and-mortar retailers.

Better times ahead

Chewy's second-quarter guidance tells us that it won't be running out of steam any time soon. The company anticipates 40% to 42% annual revenue growth in the current quarter. For the full year, Chewy is looking at revenue growth of 35% to 37%, which is close to the fiscal 2019 figure of 40%.

However, it won't be surprising to see Chewy crush its own expectations in the coming months. E-commerce in the pet products sector was gaining momentum even before the pandemic broke. A third-party report released last year revealed that 18% of pet product sales in the U.S. took place online. By 2023, the share of e-commerce in pet products in the U.S. was expected to go up to 23%.

That shift is only accelerating as Chewy's latest results and guidance indicate. More importantly, the company is taking steps to ensure that it is well-equipped to meet a spike in demand. The company recently hired 6,000 new workers at its fulfillment centers, opened its ninth fulfillment center in April, and is on track to open one more in Pennsylvania later this year.

Despite the associated costs, Chewy posted its first-ever positive adjusted EBITDA of $3.4 million last quarter, resulting in an adjusted EBITDA margin of 0.2%. The company expects to sustain this level for the entire fiscal year, forecasting breakeven adjusted EBITDA in 2020.

In all, Chewy should keep chugging along nicely as the pandemic attracts more customers and drives online pet spending higher. It won't be surprising to see Chewy sustain its impressive momentum and remain a top growth stock in a coronavirus-struck market.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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