Chewy (CHWY 2.99%) shareholders have seen some wild stock price swings over the past year. Shares have been up as much as 20% and down by the same amount at several points in the 12 months ended in late July. The volatility can be attributed to concerns about the pet supply specialist's slowing growth, balanced against optimism about its strong finances and prime market share position.
The stock's movement over the next year will depend on some factors that aren't predictable like the direction of consumer spending patterns and the timing and severity of any potential recession. But Chewy also has control over key parts of its growth outlook. With that in mind, let's look at the main trends that will drive the stock's performance through mid-2024.
Sales trends
The main element necessary in Chewy's rebound will be continued sales growth momentum. The news was mixed on that score in the most recent quarter, though. On the bright side, Chewy posted accelerating sales growth as revenue expanded 15% in its fiscal first quarter (ended April 30). Yet the company couldn't end the modest slide that shareholders have seen in its pool of active customers. Chewy lost 1% of its customer base on a year-over-year basis, marking roughly the same rate of loss in the prior full fiscal year.
There were other encouraging signs around shopper engagement, however. Customers are increasingly committing to its subscription-based delivery service with Autoship making up 75% of all sales. And net sales per active customer rose 15% to $512 per year. If the company can maintain its trajectory in these areas while returning to growth in its customer base, then the prospects for its stock returns are bright.
Positive finances
Chewy is still early in its growth story, yet its financial position is strong. Gross profit margin has been climbing in recent quarters thanks to price increases and cost controls. Cash flow was solidly positive last quarter, and Chewy is generating small but positive net earnings.
Data by YCharts.
A key part of the investing thesis is that this modest net margin will climb over time toward double digits as the company gains scale and pushes into new categories like pet health and insurance. Any progress along these lines would likely support excellent gains for patient shareholders.
The tempting price
The biggest factor suggesting positive returns for investors is that Chewy shares are valued as if the business will struggle mightily from here. The stock is priced at just 1.3 times sales, far below the peak of 7.2 that shareholders saw during the pandemic. The stock's valuation had been as high as 2.1 times sales earlier this year.
If the company can build on its sales momentum while protecting or expanding profit margins, then the outlook is bright for the stock beating the market as that valuation rebounds. On the other hand, Chewy will still need to reverse the declines in its customer base to fully restore investor confidence. Meanwhile, the pet supply industry is resistant to recessions but would still be hurt by a sharp drop in consumer spending.
