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Here's Why I Bought Chewy Stock

By Parkev Tatevosian, CFA – Sep 26, 2021 at 11:27PM

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The humanization of pets is one trend that could increase the size of the pet retailing market.

Online pet retailer Chewy (CHWY 4.00%) is demonstrating economies of scale as it increases profit margin along with revenue. 

In this segment from "The Five," recorded on Sept. 9, contributors Jason Hall and Parkev Tatevosian discuss why Chewy's business model is working so well. 

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Parkev Tatevosian: So the last stock I bought was the online pet retailer Chewy. I think of the company sort of like the Amazon for pets, not only because they are an e-commerce company, but because they have a few similar features. And I like where the pet industry is going. The humanization of pets is catching on, and people are caring more about the well-being of their furry friends.

Another thing I was liking about Chewy was the expanding gross profit margins. So from 2016 to 2021, gross profit margins expanded from 16.6% to 25.5%. And that's headed in the right direction, especially as the company blends in more of its own proprietary branded products in with third-party products it's selling on its site. So that's lifting profit margins in there as well. As of its most recent report, it had 20 million active customers, a 20% increase from last year. And another good thing about customers on Chewy is each year they're with Chewy, they spend more and more and more and more up to year five, six, seven, and eight. The long-term customers continue spending more with them, that's a trade I liked. The company is not yet profitable on an annual basis, but I like its prospects, so I'm willing to wait for them to grow.

Jason Hall: It is certainly growing, and they've proven that they can have pretty good margins on what they're doing. That auto-ship thing is really neat, too. Who was I talking about? I think we had Clay on the other day, and he was talking about, I think it's his girlfriend, that's a Chewy recurring subscriber, and I asked him, I said, "Can you tell me how much extra dog food do you actually have?" He said it's a lot, but that model has proven pretty interesting.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns shares of Amazon and Chewy. The Motley Fool owns shares of and recommends Amazon and Chewy. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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