Chewy (CHWY -2.79%) is well-known in the pet supply world but a relatively tiny player in the broader retailing industry. It hasn't yet cracked $10 billion in annual sales, after all.
But many investors see a bright future ahead for the company, which has been posting solid revenue and profit growth even through the post-pandemic slowdown in late 2022.
With that in mind, let's look at a few factors that make Chewy stock so attractive to smart investors.
Pet supply staples
Chewy's stock declined in 2022 as Wall Street worried about slowing growth and the stress from a potential economic slump ahead. But this business isn't as exposed to a recession as many of its peers.
More than 70% of Chewy's sales come from auto-ship orders, representing steady commitments from pet owners. That's a different selling model than, say, Target, where revenue trends depend almost entirely on shifting consumer preferences from one month to the next.
And almost all of Chewy's business revolves around staple products like food and healthcare. Over 83% of sales were in these non-discretionary niches, management said in a recent conference call with investors. No retailer is immune to the impacts of a recession, but Chewy's business is primed to do well even through cyclical downturns.
Pricing power
Smart investors love signs of pricing power, since they signal that a company is delivering lots of value to its customers. The ability to boost prices points to other competitive strengths, too, like a dominant market position.
Chewy has impressive pricing power. The company raised prices at a faster rate than inflation through mid-2022, for example, which allowed it to post a modest increase to its gross profit margin. Contrast that performance with companies like Target and Wayfair, which are seeing declining margins today, and you'll see why Chewy stock is loved by many growth investors.
The plan for growth
The outlook for the pet industry is positive. Not only are pet adoption rates strong, but consumers in rich markets like the U.S. are increasingly allocating more of their budget toward the pets that are seen as members of the family in many households.
CHWY Revenue (Annual) data by YCharts
Those factors bode well for Chewy's ability to boost annual sales well beyond $10 billion over the next several years. But management also has its eyes on big, complementary markets like insurance and pet wellness, which might provide further lifts to the business over time.
Chewy's more immediate goal is to expand its customer base while steadily convincing those pet owners to spend more on its products and services. That's the path that is helping the company boost revenue at a double-digit rate in 2022 while profitability increases, too.
Continued wins along those lines should help Chewy report rising revenue and much stronger earnings over the next several years. Smart investors who hold through the potentially volatile 2023 year have a good chance at looking back in a few years, thrilled to have this high-performing e-commerce stock in their portfolios.
