Chewy (CHWY 3.74%), the online-only pet retailer, experienced a surge in sales during the pandemic. Pet owners moved a significant portion of their spending online to avoid possible exposure to COVID-19, and Chewy.com became a popular destination.
Understandably, this shift in consumer shopping habits plays to Chewy's strengths as an internet business. And in the long run, an increasing part of consumer shopping will be done online, where Chewy has carved out a dominant position. Let's see why Chewy is such a good bet to gain market share.
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Chewy takes more than half of pure online sales
Online spending on pet food and supplies as a share of overall spending is lagging behind rates of categories like books and electronics. But maybe not for long. According to Chewy management, the online penetration rate for pet food and supplies grew from 7% in 2015 to 30% in 2020. Furthermore, that is forecast to increase to reach 53% penetration, which would bring it in line with current penetration rates of the books and electronics categories.
During the question and answer session of Chewy's fourth-quarter conference call, CEO Sumit Singh highlighted his belief that Chewy captured 57% of pure e-commerce sales of pet products in 2020. And he believes that Chewy will go on to capture over 50% of all growth that will happen in the online channels in 2021.
In other words, there is a secular trend where consumers are shifting their pet spending online. And when considering online sales, Chewy is expecting to capture over 50% of growth through that channel. That will lead to major market share gains for Chewy, which is estimated to have roughly 7% of the overall retail pet food and supply market. Chewy's sales in its fiscal year ending Jan. 31 were $7.15 billion, and the U.S. pet market is estimated to be worth $100 billion annually.
Investor takeaway
Chewy is in a great position to capitalize on the overarching move to online shopping. Buying stuff online is usually more convenient. This is especially true for items you need on a recurring basis, like pet food. What's more, you can place these items on automatic delivery -- that way you never forget Sparky's food and you will reduce the chances of needing an urgent trip to the pet store.
While Chewy's sales may not grow at the rapid 47.4% rate they did during 2020, its growth has several years of runway. Still, in its few years as a public company, Chewy is consistently growing revenue above 40% each quarter over the same quarter in the previous year. However, Chewy's internal forecast of revenue growth for 2021 is between 24% and 25%. Since the forecast highlights a sizable deceleration from growth rates in the past, Chewy's share price fell in response.
The increasing sales are allowing Chewy to leverage its fixed costs and improve its gross profit margin. From 2016 to 2020, its gross profit margin increased from 16.6% to 25.5%.
Chewy stock is trading at a forward price-to-sales ratio near 3.7. That's after its shares have declined 12% this year. The selling started as a result of management's forecast of a significant deceleration of revenue growth. Still, it was unrealistic to expect the boosted revenue growth rates during the pandemic to sustain for the long term. Investors looking for a growth stock with several years of runway ahead of it can consider adding Chewy to their portfolios.
