As an e-commerce specialist, Chewy (CHWY 2.15%) has been caught up in the wider market downturn that has sent many tech stocks reeling in 2022. Shares are down by over 30% through early November, in fact.
Wall Street is worried about slowing growth compared to earlier phases of the pandemic when spiking adoption rates lifted sales. The pet supply specialist is also facing profitability challenges associated with rising costs.
But now might be just the time to consider buying Chewy's stock. Let's take a look at a few reasons why it looks attractive as a long-term investment.
Shoppers are engaged
Yes, Chewy's latest 13% sales increase represents a significant slowdown compared to last year's growth. Investors celebrated several consecutive quarters of over-40% year-over-year growth in 2020, after all. Today's expansion rate is much weaker, in part because pet owners are reverting to some pre-pandemic shopping patterns after temporarily moving more spending online.
But Chewy is still growing faster than the wider market, and that market share growth is just one indication of its enduring strength in a tough selling environment.
Another sign of that strength is its auto-ship service, which recently hit a record 73% of sales. In contrast to most e-commerce retailers, Chewy's customer base overwhelmingly chooses to commit to steady monthly purchases. That rising engagement implies continued market share gains ahead.
Chewy is profitable
Chewy has lost some of the customers it gained during the lockdown phases of the pandemic. And worse yet, many of these shoppers had disproportionately purchased higher-margin products rather than consumable pet supplies like food. This shift added pressure to a business that has already been hit with soaring costs.
Yet Chewy is having no trouble passing along those extra costs. "Growth in pricing exceeded escalating cost inflation," CFO Mario Marte said in a recent conference call. That success contributed to rising gross profit margin even as many peers in the industry reported declines. Chewy is in no danger of slipping into the red, either. On the contrary, adjusted profit margin has ticked up to 3% of sales in the last six months compared to 2.3% of sales a year earlier.
The industry is recession-resistant
No industry is immune from the type of demand pressure that a recession would bring. But Chewy's business is well positioned to navigate through a downturn, should one develop in the coming quarters. Consumers tend to avoid making drastic changes to their pets' food, treat, and toy supplies, making this niche unusually stable. And those so-called "nondiscretionary" categories represent over 80% of Chewy's sales base right now.
In fact, the last few quarters provide a good indication for how the business might operate through a recession. Chewy has already seen a big drop in its discretionary product lines, yet it continued to grow sales, win market share, and boost overall profitability.
A more serious downturn would likely push revenue lower while adding more pressure to its earnings over the short term. But Chewy's business seems primed to succeed through whatever selling climate develops into 2023.
That's why investors should consider buying this stock, especially given its over-30% decline through most of the past year. That slump doesn't reflect the steady market share progress the business is making, or Chewy's solid finances.
