Chewy (CHWY +2.85%) stock is available at a huge discount today. At less than $20 per share, its valuation is near an all-time low. Shares peaked at $120 during the pandemic but since then have collapsed by more than 80%.
This brutal drop reflects pessimism around the pet supply specialist's sales prospects in a slow-growing industry. Pet adoption rates returned to more normal levels in the post-lockdown period, and that shift means new pricing and demand pressures.
The stock could be a good buy, though, for investors willing to endure some extreme volatility in 2024. Let's take a closer look.
Market share gains
Chewy's recent 8% sales uptick is a far cry from the 24% sales spike the company reported in 2021, back when the pet supply industry, and e-commerce in general, was soaring. A lot has changed since then, but the main challenge is that people just aren't spending as freely on discretionary pet purchases. The industry grew at low-single-digit rate in the Q3 period, management estimates.
NYSE: CHWY
Key Data Points
The good news is that Chewy is winning market share through that tough selling environment. Sales were up 8% last quarter, and average annual spending rose 14% to a record $540 per customer. Those gains were offset by Chewy's continued loss of customers. Its active user base shrank 1% in the nine months that ran through late October. The chain needs to post a rebound to get back on a firmer growth footing in 2024.
Financial checkup
Chewy is profitable by just the slightest margin, which is disappointing given its large sales base. Yet its other financial metrics are excellent.
Adjusted earnings and free cash flow are solidly positive, for example, and gross profit margin has inched higher over the past few quarters, even as shoppers became more price conscious. The Q3 level of 29% is a record, in fact.
That's good news, since it shows Chewy's pricing power and suggests high customer loyalty in this competitive market. Engagement in its subscription delivery service spiked as well, rising 13% last quarter and represented nearly 80% of sales.
Management said this success was driven by Chewy's wide mix of nondiscretionary pet supplies, especially in the healthcare niche. "The loyalty and spending resiliency of our [subscription] customers remains unabated," executives said in a December 2023 letter to shareholders.
Watch for a rebound
Chewy will answer some big questions for investors when it announces its Q4 results on March 20. The report will include management's official outlook for 2024 as well.
The stock's slump heading into that report suggests that Wall Street is bracing for bad news. While peers competing in the e-commerce industry, ranging from Amazon to Walmart, have described much higher demand over the holiday shopping season, the pet supply industry isn't as robust. Chewy is in a strong financial position, meanwhile, and has a good shot at boosting profit margin in 2024.
Wall Street might not be convinced about the company's rebound prospects, though, until Chewy can show that it is steadily gaining new customers. That's why investors should watch its active customer metric later this month. Until then, the stock looks a bit risky even while priced at below $20 per share.
