2023 has been a tough year for Chewy (CHWY 2.99%) shareholders, who have seen the stock drop 52% year to date while the S&P 500 is up 12%. The bulk of those declines came in the past three months as Wall Street lowered its short-term expectations for the pet supply industry. Peers such as Petco have seen similar slumps and are warning about more cautious consumer spending patterns.
Investing returns should be measured in years and decades, though, rather than with quarter-to-quarter swings. That's why it pays for investors to tune out the noise and focus instead on a company's wider opportunities. With that in mind, let's look at where Chewy could be headed over the next several years.
Higher sales
Chewy has had trouble gaining new customers in its post-pandemic lull. Its pool of active users fell 0.6% through the first half of fiscal 2023 (ended July 30), improving slightly from the 1.2% decline that investors saw in the previous full fiscal year. And the pet owners who remain engaged are becoming more cautious with their spending choices.
"We are sensing a shift in consumer mindset toward being more discerning," management said in a recent shareholder letter while pointing to economic headwinds such as inflation.
Still, Chewy is likely to have a bigger base of customers -- spending more cash -- in a few years. Investors can look at current engagement trends to see evidence of this success already at work. Average annual spending per customer is up 15% in the past six months to $530, for example.
And Chewy has achieved a record proportion of users (75.5%) signing up for its Autoship subscription service. Continued success here is the surest path toward positive returns for investors as the business expands.
A wider footprint
Chewy is just now pushing into its first international market, Canada, but there's a good chance that this expansion is just the first of several new geographies for the company. In less than five years, the company has tripled its trailing-12-month revenue to $10.8 billion, and its e-commerce focus provides it with plenty of flexibility to expand.
The pace of international growth will partly be determined by how well the Canada move goes, but there is a lot of upside and limited downside with this push. That's because Chewy is being cautious about its spending commitments and is taking on no major infrastructure investments to enter Canada. Ideally, the boost to its addressable market will simply increase sales and profit margins over time without adding a lot of financial pressure to the business in the short term.
The stock's path
Sure, Chewy's short-term outlook is cloudy right now. Wall Street abhors uncertainty, and that's exactly what investors got when they heard the management team talk about a shift toward cautious spending in recent months. The pet supply niche is resistant to recessions, but it isn't immune from such macroecnomic pressures.
Stepping back, though, Chewy has prime positioning in the industry and is creating more satisfied customers with each passing month. And the stock has become much cheaper. Investors are paying about 0.7 times sales for the business today, down from a peak of 7 times sales earlier this year.
Those two factors should support solid returns for long-term investors willing to hold the growth stock through this more volatile period.
