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Should You Invest in Chewy for 2022?

By Parkev Tatevosian, CFA – Jan 8, 2022 at 5:30AM

Key Points

  • Chewy has grown nearly 15% to 20.4 million active customers.
  • Its gross profit margin has expanded by more than 100 basis points.
  • Plus, it sells for less than half of its peak price-to-sales ratio.

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The e-commerce retailer is expanding profit margins while growing customers and revenue.

Online pet retailer Chewy (CHWY -3.84%) had a challenging year in 2021. The company thrived at the pandemic's onset in 2020 when millions of folks were looking to avoid shopping in brick-and-mortar stores and turned to for their pets' needs. 

However, as the economic reopening and vaccination campaign against COVID-19 gained momentum, customer acquisition growth slowed at Chewy. As a result, its stock price fell 34% in 2021. But as the saying goes, past performance is not always indicative of future results. So let's look at Chewy's business to determine if 2022 could be a better year for its investors.

A picture of a dog with its tongue out.

Image source: Getty Images.

Chewy is growing customers, revenue, and profit margins

While Chewy's revenue growth has decelerated, it has still managed to grow quite nicely -- up 27.4% year over year in the nine months ended Oct. 31. Customers are increasing their spending at Chewy as the company expands its product assortment. Plus, the website is adding new customers every quarter.

Consumables are Chewy's largest category with sales of $4.5 billion in its most recent nine-month period. That was up by 25.3% from the same time the prior year and totaled more than two-thirds of all Chewy sales. Consumables include items like wet and dry food for dogs, cats, and other pets and are typically things people need regularly. Because food is necessary, Chewy's business is a little more recession-proof. Pets need to eat whether the economy is in boom or bust.

However, what a pet eats is a different matter. For you pet parents who are reading this article, you may have experience with a dog or a cat that will only eat a particular type or brand of pet food. So the more items Chewy carries, the more likely it will have what pet owners are looking for and keep those customers from going elsewhere. To this end, expect Chewy to add product assortment, which will help increase sales.

Chewy's management is also proving adept at acquiring and retaining customers. As of Oct. 31, it boasted 20.4 million active customers, up 14.7% from the same time last year. Additionally, each customer is spending more as time passes. Net sales per active customer increased by 15.4% to an average of $419 at the end of October.

The growth in customers and spending per customer enables Chewy to operate with increased efficiency. In 2016, Chewy reported a gross profit margin of 16.6%. So far in the nine months ended Oct. 31, Chewy's gross profit margin is 27.2%. That's especially impressive considering the inflationary environment all businesses are facing.

The reward is worth the risk in Chewy stock

Rising costs will make 2022 a challenging year for profit margins at Chewy. The company's contracts for outbound shipping have reset higher in January and will be a headwind from now on. What's more, Chewy is finding out that it needs to pay higher wages to attract enough staff to operate fulfillment centers. Finally, product costs are going up, and it remains to be seen if Chewy can forward those price increases onto customers without causing a decrease in demand.

Still, the bad news may already be priced into a stock that was down 34% in 2021. Today, Chewy is trading at a price-to-sales ratio of 2.6, less than half of the high it was selling for at its peak. At this lower price, the potential reward for investing in Chewy's stock outweighs the near-term risks. Long-term investors can feel good about adding Chewy stock to their portfolios in 2022.

Parkev Tatevosian owns Chewy, Inc. The Motley Fool owns and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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