Chewy (CHWY 1.92%) has had an eventful journey in its relatively short life. It was founded in 2011 as an online retailer for pet food and other pet-related products. It was then acquired by PetSmart in 2017, launched an online pharmacy for pets the following year, and was spun off in an IPO in 2019.
Chewy has impressed investors since its public debut. Between 2019 and 2022, its revenue grew at a compound annual rate (CAGR) of 28%, and its gross margin expanded from 23.6% to 28%. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2020, and it turned profitable on a generally accepted accounting principles (GAAP) basis in 2022.
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Chewy was well-insulated from the pandemic and inflation since consumers will still buy food, drugs, and other essential products for their pets during economic downturns. Its early mover's advantage also prevented Amazon (NASDAQ: AMZN) from gaining meaningful ground with its own private-label pet products over the past five years, and its scale prevented it from repeating the same mistakes as Pets.com during the dot-com bust.
Chewy's stock has dropped about 70% since hitting its all-time high during the buying frenzy in growth stocks in early 2021. But at $34, it still trades more than 50% above its IPO price of $22 -- and it looks cheap at just 1.3 times this year's sales. I believe Chewy is still a solid long-term investment, but today I'll focus on three deeper aspects of Chewy's business that smart investors should be familiar with now.
1. Its expansion into pet insurance
Last year, Chewy rolled out CarePlus, a suite of pet healthcare and wellness plans, across the United States. Its wellness plans start at $20 per month and cover annual exams, vaccines, parasiticides, and other preventative care treatments. Its insurance plans, which are provided by its partners Trupanion (NASDAQ: TRUP) and Lemonade (NYSE: LMND), come in $20, $60, and $100 per-month tiers.
Chewy expects CarePlus to complement is online pharmacy and drive its long-term growth. During its third quarter conference call last December, CEO Sumit Singh said the company remains "bullish on the pet insurance space and our ability to drive customer acquisition and deepen customer engagement." Singh also said the company was "pleased" with its "very early" progress in pet insurance so far.
According to Beyond Market, the global pet insurance market could still expand at a CAGR of 16.3% between 2023 and 2030. Therefore, investors should keep a close eye on this small but growing component of its "Chewy Health" ecosystem over the next few years.
2. Its private-label brands
Last year, Chewy launched its first private brand, Vibeful, for multivitamins, hip and joint supplements, and other wellness products. Over the long term, Chewy plans to expand its portfolio of private brands to lock in more customers, widen its moat, and boost its gross margins. At the end of 2022, Singh said Chewy's private brands only accounted for a "mid- to high-single digit" percentage of its total sales -- but he expects that percentage to eventually rise to 15%-30% as it launches more products.
3. Its international expansion
Chewy still generates all of its revenue in the United States, but it plans to expand into its first international market "over the next few quarters." Singh didn't name the actual region during the company's latest conference call, but he said it would target markets with a "geographic proximity and consumer behavior similarities" relative to the U.S. market.
Chewy expects that expansion to temporarily compress its near-term adjusted EBITDA margins, but it doesn't expect it to impact its sales growth or gross margins. If that expansion is successful, it might just unlock the next phase of Chewy's growth -- since a lot of countries still lack a combined online marketplace and healthcare platform for pets.
Chewy still has plenty of room to grow
Chewy's stock got overheated in early 2021, but it's a lot cheaper now and the company still has a bright future. The expansion of its pet insurance, private-label, and overseas businesses could drive its stock to fresh highs over the next few years -- and deliver bigger long-term returns than Amazon or other established e-commerce leaders.
