Online pet retailer Chewy (CHWY -2.79%) just became a better value for investors after the stock fell 24% in the last month. Most of the decrease came after the company reported fiscal second-quarter earnings on Sept. 1 that disappointed the market.
Still, the company has solid growth prospects with a long-run tailwind at its back. And the price drop means investors can buy at a better entry point.
Chewy's stock is trading at a forward price-to-sales ratio of 3.36. Image source: Getty Images.
Chewy's long-run prospects still look good
Chewy boasts 20 million active customers, 21% more than this time last year. These shoppers increasingly place their orders for automatic delivery. Indeed, 70% of overall sales were made through the company's Autoship program. These recurring sales are more profitable for Chewy to service because customers don't need reminders to make a purchase. Orders are planned in advance, and deliveries are bundled together.
Chewy is getting a major assist in customer acquisition and sales from the long-running trend of people shifting to online shopping. According to Statista, In 2019, e-commerce sales accounted for 11 percent of all retail sales in the U.S, this figure is expected to reach 15 percent in 2021. The trend is unlikely to reverse anytime soon because it offers convenience. Visiting a pet store is not something many people look forward to, and if a company can remove even one errand on people's weekly or monthly to-do list, they are more likely to sign up.
Moreover, Chewy's expanding gross profit margin results from scale, proprietary product sales, and an increasing catalog of health products. From fiscal 2016 to 2021, Chewy's gross profit margin increased from 16.6% to 25.5%. As Chewy grows, its size creates efficiencies of scale that boost profits. For instance, if a customer orders more often (orders placed within a day or two of each other could potentially be shipped together) or increases order size, Chewy can save on fulfillment expenses by increasing revenue per delivery.
Chewy is also introducing its own branded products to the mix of third-party products it sells on its website. Chewy branded products come with higher profit margins, so its margins will increase if Chewy can continue increasing the percentage of proprietary branded sales. Similarly, health products are higher margin, and Chewy already sees the segment taking a larger part of overall sales.
A better value
The price drop has the stock trading at a forward price-to-sales ratio of 3.4, lower than the recent peak of 4.5 and far lower than the peak earlier in the year of over six. The company's long-run prospects have not deteriorated. Rather, investors are worried that as economies are reopening, Chewy's sales could be negatively affected.
The thought is certainly rational. The company benefited tremendously since the pandemic onset as consumers looked to avoid shopping in person. The reverse could be true as folks return to habits they were accustomed to before the outbreak. Still, Chewy was on a rapid growth trajectory even before the outbreak. It's not likely to grow customers and revenue as fast as it did during economic lockdowns, but growth is likely to continue for several years.
Fortunately for those interested, the market concerns are making Chewy stock a better value right now.
