In late May, Chewy (CHWY -0.60%) gave investors some good reasons to be excited about its business. While the e-commerce retailer is still seeing modest customer losses in the wake of pandemic-related demand spikes, sales trends were surprisingly strong. The pet supply giant also announced details about its international expansion, which is set to start in just a few months.
But what do these positive trends mean for the stock in 2023 and beyond? Let's take a closer look.
Growth rates
Chewy's first-quarter update showed improving sales trends that helped the company stand out from peers like Petco. Sure, its customer base shrank by about 1%, continuing the 1% decline rate that investors saw in the past full fiscal year. But there were enough positive signs around demand to offset that modest drop.
For example, average annual spending per customer jumped 15% to $512. And the proportion of Chewy's sales that are subscription-based rose to a record 75%.
Management said in a shareholder letter that they saw strength in a few premium product niches, too, like pet healthcare. This move was a welcome shift following several quarters of demand tilting away from higher-margin merchandise as consumer spending slowed.
Rising margins
As you might expect, these sales improvements helped power strong profits. Gross profit margin rose by a percentage point to 28% of sales, and net income held steady at 1% of sales. Chewy achieved solidly positive free cash flow as well. "We produced accelerating net sales and continue to deliver steady growth in profitability," executives said in the shareholder letter.
Much of the stock price jump immediately following the report can be tied to these encouraging metrics around Chewy's finances. But investors were also happy to hear that the company is expanding into Canada, its first international market, in the third quarter.
This expansion won't add major new capital spending thanks to the company's cloud infrastructure but it will boost Chewy's addressable market size. Success here might pave the way for further international launches ahead.
The outlook
Chewy's improving demand and profit margin trends, plus the potential for higher international sales over time, give investors concrete reasons to feel more optimistic about the stock. While shareholders would love to see a return to customer growth, it is understandable that modest declines would happen here after several years of above-average growth rates. Gains here could start as early as the second half of 2023, given the solid engagement metrics today.
It's also great news for shareholders that Chewy is situated in an industry that tends to do well during recessions. Pet owners don't dramatically scale back on pet essentials even as they reduce spending elsewhere.
Overall, the prospects for Chewy's stock are bright, both through 2023 and as the company extends its scale in 2024 and beyond. There's no guarantee that shares will perform well in any short-term period. But Chewy is winning market share, boosting customer loyalty, and generating positive earnings and cash flow. These factors should all support solid shareholder returns over time.
