Chewy's (CHWY -2.24%) stock has been tearing up in the past month. Rising 54% in a volatile market like this is impressive. The e-commerce retailer defied expectations in its most recent quarter as it grappled effectively with inflation to preserve profit margins.
That's giving investors confidence that management has the right recipe for the current macroeconomic backdrop. But does Chewy's stock have room to go higher from here?
Chewy's operational improvements are offsetting inflationary pressure.
In its most recent quarter, which ended on May 1, Chewy saw net sales increase by 13.7% from the same quarter the year before. Folks brought home pets at higher levels during the pandemic as social isolation brought about the desire for the companionship of a furry friend. Fortunately for Chewy, pet ownership is a long-term commitment. Pets adopted during the pandemic could fuel sales growth for Chewy for several years to a decade or more.
Perhaps more impressively than Chewy's sales increase in its most recent quarter was its cost management. Gross profit fell by only ten basis points in the quarter that ended in May. That's excellent, considering that inflation forced an increase in how much the company had to pay for fuel, wages, and products.
CHWY Gross Profit Margin (Quarterly) data by YCharts
Management is accomplishing this feat partly by improving operational efficiency. For instance, Chewy routed more of its deliveries from a newer automated fulfillment center that costs 19% less than its older centers. That was a great sign for investors encouraged by its ability to offset rising wages by automating more of its functions.
In another logistical win, Chewy reduced the amount of long-distance shipping it employed during the quarter by 15%. Of course, shipping greater distances costs more money, so reducing those occurrences worked wonders on its profit margins.
On the revenue front, management has forecasted a 16% revenue increase for the fiscal year 2022. That would come on top of the 47.4% increase it reported in 2021.
Chewy's already expensive price rose further
CHWY PE Ratio data by YCharts
Even before this recent surge in Chewy's stock price, it was already expensive. At a price-to-earnings ratio of 2,200 and a price-to-free cash flow ratio of 1,428, Chewy investors are relying on the phenomenal growth in those metrics over the next several years to make up for the premium prices of the present.
While management is doing an excellent job and will benefit from pets adopted during the pandemic, the company still faces near-term pressure from inflation, and the stock is priced for perfection. Sure, Chewy's stock can rise higher, but it's more likely it will take a breather for now.
