Chewy is a fast-growing e-commerce business focusing on pet supplies, but you wouldn't know that by looking at its recent stock performance. Shares of Chewy (CHWY 2.99%) have fallen 72% from their all-time high a few years ago, and the company's fourth-quarter earnings report didn't help. Despite posting double-digit percentage sales growth, the stock fell over weak earnings guidance and customer growth.
Chewy has all the makings of a money-maker for long-term investors, but the stock got ahead of itself when sales temporarily accelerated in 2020, which led to a steep decline last year as growth reverted back to pre-pandemic levels. Here are three reasons the market correction is a buying opportunity.
1. Chewy is still generating strong performance
Chewy is in the early stages of tackling a massive industry for pet supplies, so investors shouldn't expect to see surging profits. The numbers that matter right now are overall sales growth, which grew 13% year over year last quarter, and auto-ship customer sales, which increased by 18% and generated 73% of total sales in the quarter.
Autoship is a popular subscription program where customers can have their preferred pet food or medicine shipped to their door every month. These sales are valuable to Chewy, since they provide management a line of sight into future sales, which helps for expense planning.
What's more, most of Chewy's customers just joined the platform within the last three years, which could be a catalyst for an acceleration in overall sales growth once the broader e-commerce market is stronger. Management believes there are ample opportunities for these newer cohorts to spend more over the next several years.
Image source: Getty Images.
2. Chewy plans to expand internationally
One of the reasons the stock fell after the company released its earnings report was a softer outlook for margins and the 1.2% year-over-year decline in active customers last quarter. Other top e-commerce companies have also reported declines in customers, so this doesn't reflect anything wrong with Chewy's business, but just the broader weakness in online shopping right now.
Most importantly, the company has "significant white space for expansion," as CEO Sumit Singh noted on the earnings call. To tackle the opportunities ahead, Chewy plans to launch in its first international market in the near future.
Obviously, there are costs involved with launching in new markets, and this partly explains why management guided for a negative impact to its operating costs and marketing for 2023.
Wall Street is focused on short-term performance targets. Chewy's guidance didn't match analysts' 2023 earnings expectations, leading to the post-earnings sell-off. But Chewy's investments in international expansion are setting the stage for substantial long-term growth.
3. Chewy still has a massive growth opportunity
The U.S. pet market alone is estimated to be worth $130 billion. During the earnings call, Singh noted that the pet industry has consistently grown through the ups and downs of previous economic cycles, making it an attractive market for investors.
Chewy's investments in its auto-ship program and additional services, such as pharmacy, should help the company gain market share over time and lock in loyal customers. Management credited strong demand for non-discretionary categories, such as consumables and pet healthcare, for the company's record sales in 2022.
Singh also mentioned that the company's gross profit margin should improve over the long term as more customers purchase higher-margin goods and services, including private brands, Chewy Health, pet insurance, and sponsored advertising on its platform.
Chewy has a lot going for it that the market is overlooking. For all these reasons, I would look at any sell-off in the stock as a buying opportunity. The initiatives management is investing in should deliver nice returns for investors in the next bull market.
