What happened
Shares of Chewy (CHWY -6.07%) are down 10.9% from where they closed last Friday, according to data from S&P Global Market Intelligence, as growing fears of a recession and persistent inflation put pressure on the online pet supplies retailer.
A Wall Street Journal article last week noted pet costs are rising well ahead of inflation, jumping 15% from the year-ago period versus 6.4% for human-related costs. The Journal said this was causing some people to give up their pets.
Image source: Getty Images.
So what
Pet ownership got a big boost during the pandemic and the boom is easing up, even though pet ownership remains at an all-time high and Americans are spending more than ever on their pets.
The American Pet Products Association says so-called pet parents spent over $123 billion on their fur babies in 2021, the latest data available, but it's expected to rise again for the past year too. The trends are in Chewy's favor.
Dog food represents the largest product line Chewy sells and it's also the biggest category in pet expenditures, representing 40% of the total spent. Chewy will likely continue to benefit from the premiumization trend that has been underway in pet care for several years, as owners become increasingly reluctant to go cheap on what many consider to be a member of the family.
Chewy says net sales per active customer continues to rise, up 14% in the third quarter to $477, and it still has more to go. Core food products and healthcare comprise 83% of the pet shop's sales. Vet care and products are now the second-biggest category, according to the APPA.
Now what
Chewy's stock has performed better than rivals like Petco Health & Wellness and online subscription box service Bark. Where Chewy is up almost 3% over the past 12 months, Petco and Bark are down 38% and 51%, respectively.
Despite Chewy's shares currently exhibiting weakness due to the hangover from the pandemic boom, it has strong customer loyalty and favorable industry tailwinds that make it a compelling long-term investment.
Chewy's stock had rallied from around $35 per share at the start of 2023 to $53 per share just a few weeks later, so profit taking is undoubtedly playing a role in its recent decline. But the strong ties that bind owners to their pets should cause Chewy to rebound.
