Chewy (CHWY 1.85%) shares briefly crossed $120 in early 2021 but have collapsed since then. At about $35 per share in early 2023, the e-commerce stock is down over 70% from its all-time high. Sure, some of that valuation decline makes sense considering that sales trends have decelerated. The possibility of a recession ahead also has Wall Street understandably worried about what will happen to the earnings power of many growth stocks.
But Chewy shares don't deserve to be caught up in those issues. Let's take a closer look at why the stock looks like a steal after its 2022 drop.
Recession resistant
Many formerly high-flying e-commerce specialists have been brought low by the sudden shift in consumer demand back toward in-person shopping. But Chewy's growth hangover has been modest. Sales are up 14% in the nine months that ended in late October, in fact. Compare that steady growth with sharp declines at other e-tailers like Wayfair.
Chewy is winning market share in the pet retailing industry and expanding its customer base, albeit at a slower rate than in 2021. That success implies solid results in 2023 and beyond, even if economic growth trends slow further.
Executives said in November that the shifting economic landscape was pinching demand for some products without jeopardizing Chewy's broader growth pace.
"What hasn't changed," CEO Sumit Singh said in a conference call, "is how much pet parents value the enduring companionship of their pets, and it is this emotional bond that sustains the pet category through all phases of the economic cycle."
Strong finances
Chewy's business is also in a solid financial position that should help it thrive through even a sharp drop in consumer spending. Gross profit margin stood at a healthy 28% of sales last quarter, up slightly compared to a year earlier. Chewy is generating solid profits and positive cash flow, too.
CHWY Gross Profit Margin data by YCharts
These wins mean the retailer likely won't have to rely on debt to fund its growth initiatives. They also protect the business from having to implement dramatic cost cuts or restructuring moves that could impair its long-term earnings prospects.
Getting bigger
Projecting Chewy's expansion path from here doesn't require many difficult or complicated strategic wins. The company can simply continue winning more share of customers' pet spending while leaning on its strength in staple categories until the cloudy economic forecast clears up. In the meantime, management can direct some of its ample resources toward new growth lines like digital advertising, pet health and insurance, as well as its wellness brands.
None of these positive factors protect Chewy's stock from further short-term declines. The shares might continue shrinking as Wall Street steers away from e-commerce companies and any other stock that might be exposed to slower consumer spending.
But Chewy's latest results show how it might continue growing sales and earnings through a recession, with help from its focus on essential products like food and the large proportion of customers that are committed to regular order shipments.
Yes, the next few quarters might be rocky for the business if economic volatility continues. But there's every reason to expect Chewy to continue generating solid operating returns that will eventually translate into market-thumping shareholder gains.
