As of this writing, Chewy's (CHWY 4.13%) stock is down 23% so far in 2022 and 49% in the past six months. The company was a darling at the onset of the pandemic as folks increased the adoption of new pets.
However, Chewy is now facing a challenging scenario in the short term as economies reopen. The boom in pet adoption is slowing, and supply-chain shortages are hitting it with rising costs. Let's look closer at its prospects and determine if Chewy's stock price crash makes it a buy right now.
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Customers value the service Chewy provides
Chewy is an e-commerce pet retailer. In other words, it sells exclusively online. It's no surprise then that sales would boom at the pandemic's onset when folks aimed to reduce shopping in person. Impressively, Chewy was sustaining sales and customer growth in 2021 despite the economic reopening.
In its most recent quarter ended Oct. 31, sales increased by 24.1% from the same quarter of the prior year. Additionally, active customers increased 14.7% year-over-year to 20.4 million. An improved customer value proposition fuels that growth. For instance, customers who sign up for Chewy's autoship program (for receiving regular deliveries) also gain free access to its telehealth service. The feature is a bridge between taking your pet for a potentially expensive vet visit and neglecting your furry friend's ailments altogether. An impressive 70.6% of Chewy's sales come through its autoship service.
Moreover, Chewy keeps expanding gross profit margins even in the face of short-term pressures. Widespread supply-chain disruptions raise the prices of the goods and services Chewy needs to serve its customers. Still, it expanded its gross profit margin by 110 basis points year-over-year in Q3. Management's skill in dealing with rising costs and delivering profit expansion bodes well for shareholders.
These headwinds are likely also short-term. The coronavirus pandemic is the main culprit for disrupting supply chains by sending workers home to isolate while they recover from infection. When the pandemic subsides, the economic output can expand to meet robust consumer demand.
Longer term, the company feels it has several tailwinds at its back, including increased pet ownership, higher per-pet spending, and a shift to e-commerce spending. Some of that is already bearing fruit in Chewy's $419 net sales per active customer, which was up by 15.4% year-over-year.
An excellent time to start buying Chewy stock
Chewy's stock price crash has it selling at a price-to-sales ratio of 2.3, near the lowest in the past three years. It appears that the market is already pricing in the difficulties of the short term. Meanwhile, the company has added millions of new customers that are sticking around and raising spending with Chewy.
This might be an excellent time to acquire shares of Chewy stock. To alleviate some of the risks of the stock falling further in 2022, investors might break down their purchase allocation into several parts and buy shares throughout the year.
