Over the past 12 months, shares of Chewy (CHWY -0.58%) have declined roughly 30% from their highs. Over that same span the S&P 500 index is down around 7% from its highs. Clearly, the online pet store has fallen out of favor. But there are still some reasons to be positive.
Avoiding the bricks
Like so many other digital-centric brands, Chewy was a market darling in 2020 when the coronavirus pandemic had consumers avoiding physical stores. In fact, between the start of 2020 and early 2021, the stock gained over 250%. It has since plunged by around 70% from that peak. Interestingly, the shares remain about 15% or so higher than where they started out in 2020.
Image source: Getty Images.
The big picture from that wild ride is probably that Chewy got caught up in a market mania. But there's also something real going on here from a business perspective, since the stock hasn't plunged toward zero as many of the other coronavirus darlings have. In fact, 2022 was a fairly solid year for the company.
For the full year, Chewy reported revenue of $10.1 billion, up 13.6% over 2021. And that continues a long streak of rising top-line results. On the bottom line, earnings came in at $0.12 per share in 2022, up from a loss of $0.18 in 2021. On an adjusted basis, which takes out one-time items, Chewy earned $0.53 per share versus $0.03 in 2021.
Either way you look at it, the company's earnings statement looked way better last year than it did in the prior year.
CHWY Revenue (Quarterly) data by YCharts
What about the future?
Looking out to 2023, however, investors have been a little let down. The company is calling for revenue growth of between 10% and 12%, which should be viewed as pretty strong. However, the company is expecting its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin to be flat to lower during the year. This hints that earnings will not be quite as desirable a read. But there's an important qualifier here.
The company remains in growth mode, spending material amounts of cash to grow its business. Right now, the focus is on expanding its geographic reach and increasing the business's efficiency. That cash has to come from somewhere. Specifically, the company's adjusted EBITDA margin call for 2023 is between around 2.5% and 3%.
Without the capital investments it is planning, management believes that figure would be 3.5%. Giving up some margin to keep improving the business is hardly a bad call, assuming that the company is benefiting from it financially. On that score, management stated that it expects to double its free cash flow in 2023 from 2022 levels. That's a clear positive.
Not a bad story
Chewy is not a great investment for every investor as young growth stocks can be very volatile and require an ironclad stomach to own as they execute their plans. But for long-term investors, the roller coaster can be worth it. Indeed, it appears that Chewy is doing a reasonably good job of growing and, just as importantly, it's doing so in a profitable manner.
With the stock down so much from its highs at this point, this company is probably worth owning for growth-oriented investors so long as it can continue to generate positive free cash flow to fund its ongoing growth.
