Online pet products retailer Chewy (CHWY 4.95%) benefited greatly from the economic shutdowns that were widespread in the early stages of the coronavirus pandemic. People were shopping more from home and, trying to fill the void left by a dearth of human interaction, pet adoptions increased. That proved to be rocket fuel to Chewy's top line, which expanded at an almost unbelievable clip.
A year later, the company's growth is still encouraging -- but not eye- popping, and that slowdown is why Chewy's stock ended up falling 8.1% on Friday. So do investors have reason to be disappointed?
Growth then versus growth now
Chewy's net sales in fiscal 2020 (which ended this Jan. 31) came in at just over $7.1 billion, up a massive 47.4% over the full-year 2019 tally of $4.8 billion. That's an incredible number by any stretch of the imagination. And, notably, it was an improvement on the 37.2% sales increase from 2018 to 2019. It's little wonder that investors got excited about the future for the retailer, noting that it also deftly addresses the long-term increase in pet spending that has been taking place for years. So it was a long-term and a short-term play all in one.
Unfortunately, when you mix long-term and short-term, Wall Street often focuses too much on the short-term. That generally means extending outsized growth expectations further than is reasonable. And when sales trends start to slow, investors turn negative even if the sales growth, on an absolute basis, is still impressive.
Chewy is a case in point. In the first quarter of 2021, year-over-year sales growth came in at 31.7%. That's well off the 47.4% figure for 2020, even though it's still incredibly strong. In the second quarter, year-over-year growth slowed even more to 26.8%, another good number on an absolute basis but clearly showing an ongoing deceleration. And in the recently completed third quarter, growth dropped another notch to "just" 24.1%.
Most companies would kill to see revenue growth in the high single digits, let alone 24%. But when a company is coming off a year with 47% sales growth, investors often focus on the slowing trend and not the still impressive absolute growth.
Don't get too upset
Stepping back, the big picture story is that Chewy is still focused on growth and achieving it, just at a slower rate than before. That's just par for the course -- as a company's top line grows over time, it simply takes more to move the needle. Notably, Chewy continues to find interesting ways to expand its brand and customer relationships (which are also still expanding, with the active customer count up 14.7% year over year in the third quarter). Specifically, Chewy is branching into pet insurance and providing veterinary practices with a way to sell products to their loyal customers, effectively creating a new revenue source for both the vet and Chewy. And 70.6% of its revenues come from sales that have been put on auto buy, which is kind of like an annuity income stream.
Yes, Chewy's growth is slowing down after a windfall year. However, if you're seeking a long-term growth stock, the third quarter clearly demonstrates that this pet products retailer is still moving in the right direction. In other words, if you are looking at Chewy today, don't get so caught up in the short term that you miss the attractive long-term opportunity.