If you have a dog, cat, goldfish or another type of pet, you may have heard of Chewy (CHWY 1.92%). The company is an online retailer of pet supplies -- but its goodies for pets and their owners don't stop here. Chewy also offers online vet visits, pet insurance, and items like food samplers so your dogs can choose their favorite flavors.
Chewy is delighting pets and their owners with all of this. But the company hasn't delighted investors in recent times. That's because the stock lost nearly 40% last year. And this year it's slipped 12%. That's even as the company recently became profitable and as revenue has climbed. So, you might be wondering what to do with Chewy stock right now. Should you buy, sell, or hold? Let's find out.
Progress over the years
First, let's take a look at Chewy's progress over the past several years. The company has benefited as more and more people shop online. Chewy makes the whole process easy for shoppers -- for instance, it offers automatic shipping on their favorite products, even their pets' prescription drugs. And through the company's wide variety of offerings, such as telemedicine for pets, it keeps owners coming back for just about every pet-related need.
This strategy is bearing fruit. Chewy has increased its annual revenue over four years to more than $10 billion from $3.5 billion. In that timeframe, it's also widened gross margins to 28% from 20%. And it's improved adjusted EBITDA margins to 3% from negative 6.5%. As mentioned above, the company also recently turned profitable.
CHWY Net Income (Annual) data by YCharts
All of this sounds good. But some investors are wondering if Chewy can keep the growth going -- or if it's reached its maximum. Of course, it's impossible to predict the future with 100% certainty. But a few elements support the idea of more growth ahead for Chewy.
One element is external. And that's just the idea of market size. The U.S. addressable market totals more than $130 billion. And here, Chewy sees "significant whitespace" for it to expand within this space. Importantly, Chewy doesn't just aim to sell more food or treats. Instead, the company has its eye on constant innovation across products and services. This could be a key to unlocking more growth over time.
Automating fulfillment centers
Second, Chewy is revamping its supply chain to boost growth. The company has been investing in fulfillment center automation and now has three automated centers. It's seeing efficiency there so has decided to close its first two non-automated centers. And Chewy aims to soon open another automated facility. This movement should continue to help Chewy lower costs and increase margin down the road.
Finally, Chewy's growth won't stop at U.S. borders. The company plans to open in its first international market in the next few quarters. The idea of starting with one international market is wise -- rather than tackling many locations simultaneously. This should allow Chewy to progress at a safe and steady pace -- and exit more easily if a particular market isn't working out.
Now, a quick look at the most recent earnings report. Chewy's revenue, profitability, and free cash flow reached record levels. The one area that disappointed investors was a decline in the number of active customers. It fell by 1.2% to 20.4 million for the full year. It's important to remember that the general economic environment has hurt consumer spending -- but this is a temporary situation. And Chewy continues to see gains in net sales per active customer.
Is Chewy a buy?
Let's get back to our question: Is Chewy a buy, a sell, or a hold? It's clear that even Chewy's positive earnings trends haven't helped the stock price so far. Today's ongoing economic turmoil could get in the way of any big gains for Chewy right now -- just because it's a company that depends on consumer spending.
A look at Chewy's valuation shows it's trading for 65 times forward earnings, down from more than 120 earlier this year. Today's level isn't shockingly high for a growth stock. And I consider Chewy has plenty of fuel left in the tank. But gains probably won't come overnight.
Considering all of this, I think today's price represents a reasonable entry point for long-term investors. Chewy is a great stock to buy and hold today -- to benefit from the next wave of growth in an improving economy.
