E-commerce pet goods specialist Chewy (CHWY 3.88%) will likely reach full-year profitability in 2021 -- three years ahead of analysts' prior projections -- according to a recent article in The Wall Street Journal. It's not often that a company speeds past forecasts by such a wide margin, but the pandemic gave Chewy a major opportunity for growth as Americans shopped online in record numbers and became even more attached to their four-legged friends while working from home.
Considering Chewy's financial outperformance, the pet care industry's accelerated growth (Morgan Stanley estimates it will hit an 8% compound annual growth rate through 2030), and the fact the company's shares ares down more than 30% from the all-time high they touched earlier this year, there is a strong case to buy this promising growth stock now. Here's how Chewy got to the top of the pet care market, and why it has what it takes to stay there.
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New data paints the full picture
A recent survey of more than 1,100 pet owners by Cardify.ai revealed a number of insights regarding the competitive landscape in the pet care industry. Compared with major rivals Petco and PetSmart, Chewy has the upper hand in two key areas -- average basket size and Net Promoter Score (NPS), a crucial customer-satisfaction metric.
Chewy's average basket size (in other words, the average value of a customer order) has grown from approximately $55 in 2019 to $65 in June 2021. The average basket sizes for both Petco and PetSmart also rose over that period, from the $35 to $40 range to $43 and $45, respectively. But Chewy's lead remains clear. And that doesn't just mean that its shoppers were loading up their baskets less often and buying more each time to compensate. All three retailers have similar average shopping frequencies, with customers making purchases about 1.4 to 1.6 times a month.
Notably, Chewy's Net Promoter Score is 45.7, compared to Petco's 1.6 and PetSmart's 7.5. Put simply, a positive NPS means that more of a company's customers would actively promote it to their friends than would suggest that a friend avoid it -- and the higher the score, the better. The combination of bigger-ticket sales and more satisfied customers translates to more word-of-mouth referrals and revenue growth that meaningfully outpaces its peers.
As a result, Chewy's market share has increased from 33.5% in early 2019 to 42.8% in June 2021. Both Petco and PetSmart lost market share over the same period. They currently claim about 24% and 33% of the market, respectively.
The profitability milestone
Chewy's profits are still too minimal to make the price-to-earnings ratio a meaningful valuation metric for the stock, but the big-picture takeaway is that the company has made consistent bottom-line improvements, which led to its earlier-than-expected transition to profitability. Since its fiscal 2018, Chewy's losses have shrunk (until those losses flipped to $39 million in income for fiscal 2021's first quarter, which ended May 2), and its net sales have increased consistently (to $2.14 billion in fiscal Q1, up 31.7% year over year).
The company's "autoship" sales segment -- automatically scheduled shipments to customers -- has also grown consistently throughout that period to $1.48 billion (up 34.4% year over year), providing valuable recurring revenue. Combine those figures with the company's $59 million in free cash flow, and it's safe to say Chewy's latest earnings report indicates good news for investors.
What the future holds
Chewy got to the top of the pet care industry by offering high-quality products with convenient delivery and excellent customer care. Now, it's showing that it can turn a profit, manage its cash effectively, and innovate with new high-margin offerings.
For example, Chewy's latest foray into the pet healthcare market -- a telehealth service called "Connect with a Vet" -- was rolled out earlier this year, receiving 10-out-of-10 satisfaction scores from more than 85% of the customers who rated it. Management has raised its full-year revenue guidance for fiscal 2021 to between $8.9 billion and $9.0 billion, implying annual growth of about 25%.
Chewy is becoming the runaway leader in the pet care industry by focusing on its core business and also innovating to expand its total addressable market. This stock is a great candidate for a long-term position while the company explores its applications in pet health, expands its services overseas, and further improves its core offerings.
