This has been a challenging year for investors. The 40-year high inflation has led to greater economic uncertainty, pushing the tech-heavy Nasdaq Composite down 26% year to date. But smart investors understand that bear markets come and go. What's most important to growing your nest egg over the long term is not market timing but identifying quality companies worth buying.
With that in mind, a business can stand out by showing it can maintain stable revenue growth during periods when customers tighten their wallets. Chewy (CHWY 0.79%) has passed that test. Through the first half of the year, this online seller of pet products posted double-digit sales growth while also showing a small uptick in its profit margin. Not many e-commerce companies have managed to increase their profit margin in 2022 during this period of rising expenses.
However, in its recent investor update, Chewy revised its full-year sales growth forecast down from a range of 15% to 17% to between 11% and 12%. That's not bad relative to other retailers' guidance, but it was still enough to send the stock down following the news.
The post-earnings drop could be a great opportunity to buy shares before better news sends the stock higher again. Here's the most important reason to consider investing in Chewy for the long haul.
Repeat customers fuel growth and stability
Chewy's active customers in the fiscal second quarter ended July 31 increased only 2.1% year over year. But thanks to repeat orders from this base of 20.5 million active customers, total sales grew 12.8%.
Sales growth held steady with the fiscal first quarter, which management credited to its superior value proposition and predictable stream of revenue coming from its autoship program.
Autoship is a top reason to buy and hold this growth stock for the long haul. Not many retailers can say that 73% of their total order volume is on speed dial, but Chewy can. The company is seeing autoship sales as a percentage of net sales continue to inch higher. This is a good indicator of Chewy's relative competitive strength too, as customers don't seem to be seeking out alternatives to its product selection and prices.
Data source: Chewy. Chart by author.
Pet owners must buy food from somewhere, and Chewy has won over millions of them due to convenience and a wide selection of products. It's also getting faster with delivery. The company just launched its third automated fulfillment center in Reno, Nevada.
Having a high percentage of your orders coming from a recurring autoship program is invaluable in a challenging economy. It helps management budget for the year ahead, since they have a good idea of how much revenue they will generate on a recurring basis.
Overall, it should bolster investor confidence in the business, especially as the average customer continues to spend more with Chewy. Over the last year, net sales per active customer increased 14% to $462, and this metric has been steadily inching higher in recent quarters too.
Data source: Chewy. Chart by author.
Chewy is not completely immune from a recession. It reported less spending in discretionary categories, but because 80% of its business comes from essential items like food and healthcare, it was able to grow sales and gain market share during the fiscal second quarter.
A safe growth stock at an affordable price
Chewy is operating with a narrow net profit margin of 0.8% in the first half of fiscal 2022. That's up from 0.5% in the year-ago period, despite the higher transportation costs e-commerce companies are dealing with. And Chewy should see its margin gradually expand over time.
The stock is not as cheap as it was a few months ago when shares traded at a low price-to-sales (P/S) ratio of about 1.1. It now trades at a P/S multiple of 1.5, which is still fair for a growing e-commerce business.
Given the company's opportunities to potentially upsell its loyal customers new services such as pet insurance that can generate high-margin sales for the company, the stock could be trading well below what it will be worth in another 10 years.
