Chewy (CHWY 2.99%) stock has come a long way in the last few years. The pet supply specialist's annual sales just crossed $10 billion, up from $7.1 billion in 2020.
Yet its growth trends have slowed in recent months, even as the company made big improvements on its finances. Let's take a look at where these somewhat conflicting trends might push Chewy's stock over the next several years.
Trading profits for growth
Chewy's 2022 results were mixed. Sure, the company lost customers as its base of active shoppers fell 1% following an 8% increase in the prior year. Yet this small decline was powered by management's decision to offset higher costs by raising prices. Chewy's average annual sales per customer jumped to $495 from $430, helping push overall revenue higher by 14% last year.
Other metrics imply a strong market position, too. Chewy's subscription-based sales rose to 73% of the entire business last year from 70%. Management estimates that the company won market share, too, as shoppers shifted spending toward essential pet supply products like food. Overall, the business seems poised to continue growing even in a weakening selling environment.
Financial power
Chewy's improving finances give it plenty of flexibility to attack new growth opportunities. Free cash flow was solidly positive last year, jumping to $119 million from $9 million. Gross profit margin rose at a time when many peers reported declines, and Chewy was profitable on a net income basis for the first time. "Our fourth quarter and full year 2022 results cap an incredible year," CEO Sumit Singh said in a press release.
CHWY Gross Profit Margin data by YCharts
Wall Street decided to focus instead on Chewy's modest loss of customers and the weak 2023 outlook for the pet supply industry. That short-term focus could power excellent returns for shareholders from here.
Looking ahead
Chewy has no shortage of growth opportunities for the next several years. Beyond continuing to win share in the massive U.S. pet supply market, management is planning to start entering other markets in 2023.
Meanwhile, Chewy will capitalize on customer loyalty by expanding into complementary niches like corporate-owned brands and pet health products and services. This "widening ecosystem of offerings," as management calls it, has the potential to unlock a much bigger sales base over several years.
The stock's path
Chewy's declining stock price over the past year reflects the worry that growth rates might never again approach the over 20% spike that investors saw in 2021. Sales will likely rise about 11% in 2023, according to most Wall Street pros.
However, Chewy stock delivers an attractive trade-off between risk and growth potential today. The pet supply industry is resistant to recessions, and Chewy's focus on subscription services and essential supplies makes it even less sensitive to shifting consumer preferences.
The stock's valuation has slipped to below 2 times annual sales, too, from over 6 times sales in earlier phases of the pandemic. That slump occurred even as Chewy became profitable for the first time and set new records for cash flow. Overall, these factors suggest the stock has a good chance at beating the market over the next several years as Chewy aims to push well above its current $10 billion sales footprint.
