Chewy's (CHWY 2.99%) share price is down 75% since reaching an all-time high of $120 in early 2021. As that performance suggests, investor expectations were very low entering the fiscal first-quarter earnings report on June 1. After the company showed sales increased 14% year over year with improving profitability over the previous quarter, the stock jumped 24%.
Value investors are on the hunt for deeply discounted stocks during this market correction, names that can rebound from their lows and eventually deliver big returns. When digging into Chewy's business model, the company looks like it could be significantly undervalued right now.
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Chewy can survive a bear market
Pet owners are going to spend on their pets no matter what. This is a key distinguishing characteristic between Chewy versus other e-commerce stocks. If the economy worsens and people aren't willing to spend money, some e-commerce companies that sell apparel or electronics, for example, may see pressured sales. But pet owners will still need to buy pet food, medicine, and other necessities to take care of their four-legged family members.
Chewy is a relatively safe business to invest in during a bear market. It's the largest pure-play e-commerce store for pets in the U.S. It also ended the recent quarter in solid financial shape with $604 million in cash on the balance sheet and no debt.
The most telling sign of Chewy's bullet-proof business model is the percentage of sales that come from its Autoship program. This is a popular feature that allows customers to have products automatically shipped to their doorstep on a fixed schedule. In the fiscal first quarter, Autoship made up 72.2% of customer sales, up from 69.3% in the year-ago quarter and 65.7% in fiscal 2019 (which ended in January).
Reported Autoship sales include sales made by any customer who has participated in the program in the past year. That means Autoship sales also include orders placed by customers outside of their subscriptions, so it's a good metric for tracking how much of Chewy's business is generated from its most frequent customers. Building off higher Autoship sales, Chewy reported net sales per active customer increased 15% year over year, reaching a record $446.
Chewy clearly has a very loyal customer base that continues to spend more with the company over time. This is important to understand, because most of its customer base was acquired within the last three years. This spells tremendous sales growth potential in the next several years as you'll see in the next section.
A powerful combination of growth drivers
Chewy ended the quarter with 20.6 million active customers, which is defined as a customer who purchased a product or service within the last 364-day period. Specifically, two-thirds of those customers were acquired in the last three years. This provides good visibility into future sales growth when considering spending patterns from older customer cohorts.
Within the first year of shopping with Chewy for the first time, the average customer spends less than $200. In the second year, this increases to over $400, and by the fifth year, customers spend about $700. Chewy says its oldest cohorts spend nearly $1,000 per year.
Some customers may come to Chewy for the convenience of Autoship, but as they become pleased with the service, they might think of Chewy first the next time they need to buy a new dog bed.
Eventually, those customers may want to try Chewy's health services, including the upcoming rollout of wellness plans and pet insurance. This is the powerful effect of Chewy's business model. It grows through acquiring new customers, in addition to seeing substantial sales growth from existing ones. Every new service it launches builds its growth potential and expands its addressable market.
It's not reflected in the stock price at these lows, but Chewy's business is growing in value. What is certain is that the growth in sales and net spending per customer will make Chewy's business worth far more down the road. That's why Chewy is a promising e-commerce stock to buy during this market downturn.
