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Why Is Everyone Talking About Chewy Stock?

By Adria Cimino - Apr 20, 2021 at 6:00AM

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This friend of your best friend is on its way to profitability.

Dogs may be man's best friend, but Chewy (CHWY -1.75%) is the best friend of dogs and cats. And it's also a pretty good friend of investors. Since its market debut in June 2019, shares of the online retailer of pet products have climbed nearly 150%.

Last year, this growing company took a big step toward profitability. And Chewy is moving full steam ahead with new programs and products that should drive growth into the future. Let's take a closer look at this company that everyone -- including your furry friends -- is noticing.

A young woman sitting outside smiles as she cuddles with her dog.

Image source: Getty Images.

Frogs, sheep, and horses

Chewy sells food and supplies for a variety of pets -- from household favorites to frogs, sheep, and horses. Customers can even sign up for the company's Autoship service and benefit from a small discount and automatic recurrent deliveries of selected products. Autoship sales make up nearly 70% of Chewy's total net sales. So, it's an important feature.

The company recently reached a couple of key milestones. Last year marked its first positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in every quarter. And in the fourth quarter ended Dec. 31, Chewy topped the milestone of $2 billion in quarterly sales. That took only two years. It took the company more than seven years to reach its initial goal of $1 billion in a quarter.

A major reason for Chewy's success, of course, is its ability to gain and retain customers. And an exceptional year for pet adoption gave the company an extra boost. As the coronavirus pandemic deepened in 2020, more and more people adopted dogs and cats. Chewy said that, in 2020, households with pets increased 5.7%. That's compared to a compound annual growth rate of only 0.6% in the five years through 2019.

Many of these new pet parents flocked to Chewy. Last year, Chewy noted a 40% increase in the creation of profiles on its website for recently adopted pets. In 2020, Chewy welcomed 5.7 million net active customers. That's a 42.7% year-over-year increase.

"Highly engaged" customers

New customers were "highly engaged," the company said, and purchase behavior was strong. For example, Chewy reported a 12% year-over-year increase in the average spend per new customer in the fourth quarter. The company had 19.2 million active customers at the end of the year. That's a 43% increase from the year earlier.

And these customers -- old and new -- are responsible for gains in how much money Chewy makes on the products it sells. Full-year gross margin reached a record high of 25.5%. That was due to a consumer shift into higher-margin items such as owned brands and healthcare.

This year may not bring another boom in pet adoptions. But I'm not worried about Chewy's revenue growth. The company forecasts that full-year 2021 sales may rise as much as 26% to $8.95 billion. Chewy should continue to benefit as customers who signed on in 2020 -- and older customers -- discover the company's latest initiatives: e-gift cards, personalized products, and an exciting telehealth offer called "Connect with a Vet." Much like telemedicine for humans, Chewy customers who use Autoship can access free online vet visits for their pets. Chewy eventually plans on a "monetization of the service" and aims to roll it out to all customers.

A $30 billion opportunity

And Chewy wants to reach further into the healthcare and services market in the coming years. The area represents a $30 billion opportunity for the company. The U.S. retail sales market for pet products climbed 9% to $107 billion last year, according to a Packaged Facts report.

Chewy benefited last year as consumers favored e-commerce during the worst of the pandemic. And the popularity of online shopping across product categories is likely to continue, according to McKinsey & Co. That's great news for Chewy.

Chewy shares are little changed so far this year. But if Chewy continues to increase customers and approach profitability, lasting share gains may be on the way. Meanwhile, investors -- and pet parents -- are likely to keep talking about this retail stock.

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