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Here's Why Chewy Has a Bright Future Ahead

By Jeremy Bowman and Jason Hall – Oct 5, 2021 at 7:21AM

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After a breakout 2020, Chewy still has a lot of room for growth.

Chewy (CHWY 4.00%) was a pandemic success story, but the online pet products seller still has a long growth runway. The surge in pet adoptions during the pandemic will continue to favor it, as will the accelerated shift to e-commerce. The company's autoship model is also helping build customer loyalty and move the company closer to profitabiltiy.

In this segment of Beat and Raise recorded on Sept. 1, Fool contributors Jeremy Bowman and Jason Hall discuss those factors and more.

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Jason Hall: Let's go ahead and talk a little bit about Chewy. This is a really interesting online pet stuff company that has been a really interesting growth story and has proven out that the economy and the market for people with pets, their furry babies or they're calling the fur babies. It's a huge market and it's really interesting and compelling. Tell us what's going on with Chewy and what we should expect.

Jeremy Bowman: I think Chewy is one of those stocks, they're a "pure-play in e-commerce" company. When they first hit the market, I think it was in 2018. It was one of those things where like anybody going up against Amazon, we're kind of skeptical of that, or the business world in general was. They've really proven that you can carve out a niche. What's good about pet products, I think, is it lends itself very well to e-commerce. Most of us, if we're a dog owner or cat owner, whatever you have. Reptile. We're getting food and poop bags, that sort of thing on a regular basis. Most of Chewy's customers, which lends itself well to the online retail platform.

I have some data, a similar web, web tracking service shared with me earlier today. One thing I think is great about the company is that their customers spend a lot more the longer they're on the platform. Second-year spend is $400 a year, that will ramp up to $700 on average in year five and $900 in the 9th year, so this could be because they're getting more or bigger pets, but I think it's because they like what Chewy does. They're able to do things with their customers that Amazon doesn't as far as personalization, and I think they value their customers more as pet owners than Amazon, which is more of an efficient type warehouse company.

Web visits according to similar web have still crept up in the second quarter, they've reached 54.9 million on July. That's a good sign, even as they are lapping -- I think this is going to be difficult quarter for them in some ways with the comparisons against their second quarter a year ago, which was the first full period during the pandemic. A lot of people went out and adopted pets during lockdowns, getting a furry friend to keep them company during months. The business really took off during the pandemic, that was good news for them, but now we're going to face some tough comparisons. The company is still targeting 26%-28% revenue growth for the second quarter, so I think that shows the strengths of subscription-based or the auto ship business. We'll have their report out in a few minutes.

One data point I saw from similar web that we might want to be wary of their share according to their data, at least their share of auto ship customers seems to be declining. You might have had some people during the pandemic who just went, "I'm going to go right to Chewy, just do my subscription, don't have to worry about it." Then now maybe people are trying out some cheaper things, going back to brick and mortar.

Jason Hall: Maybe they're running out of places to put all of that dog food and cat litter that they overordered.

Jeremy Bowman: [laughs] That could be true also. They might have over-estimated our need for Kibble.

Jason Hall: I have to confess, I've gone through that with Amazon's Subscribe & Save thing. But I think you hit on some of the truly interesting about this business. As much as it is just an e-commerce retail play, because that's what they are doing. There are also ways that they can get operational and incremental margins by leveraging those recurring customers, and by growing that share as they've done. A lot of the shipping costs are relatively fixed. If you can ship more stuff at the same time, you can get a little bit better margins on your shipping, so growing that relationship and growing that spend. It's almost like something from CrowdStrike that we'll talk about here in a minute is like net revenue retention. You want to grow those dollars that you're getting from your customers, so it's like the e-commerce equivalent of that metric there.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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