Chewy (CHWY 2.99%) has been a dog stock lately, and Wednesday afternoon's mixed financial update isn't going to get it out of the doghouse. The pet supplies e-tailer has been a disappointing investment through most starting lines. The stock is down 25% in this otherwise buoyant year for the general market.
Chewy is also trading 54% lower over the past year and down 78% over the last three years but obviously wasn't supposed to be this way. The pandemic four years ago saw a surge in pet adoptions. That was naturally a boost for Chewy as traditional retailers initially shuttered and it became a potential health risk to go shopping in person.
Net sales surged 47% in 2020, a year that found many traditional retailers stumble. But top-line annual growth has slowed dramatically for the last three years, culminating in a mere 4% increase in net sales for the fiscal fourth quarter that the company posted after Wednesday's market close.
The dogs and cats that people adopted when the country sheltered in place have only grown, requiring more food, treats, and playthings. Chewy's business should be accelerating instead of tapping the brakes, but this could also be the buying opportunity that the market is missing right now.
The bark side of the swoon
When net sales rose just 8% in Chewy's fiscal third quarter, it was the first time the company posted single-digit growth since going public five years ago. The top-line jump was cut by half for the fiscal fourth quarter, which ended on Jan. 28. It's not a good look, but this was actually ahead of market expectations.
Chewy's guidance was calling for a 3% uptick, and analysts had whittled their target down to 2% in the past few months. It's a beat, and the bottom-line surprise is even stronger.
The online retailer's gross and net margins widened. Chewy posted a profit of $0.07 a share and an adjusted profit of $0.18 a share, while analysts were bracing for a slight deficit. Free cash flow rose 59% for the quarter, nearly tripling for the entire fiscal year.
The stock initially moved higher on the news but shifted into reverse after Chewy's outlook came into play. The company now sees net sales climbing just 2% in the current quarter and rising 4% to 6% for all of fiscal 2024. Analysts figured it would be a slow start this year but were perched just above Chewy's outlook for the current quarter, splitting the difference with a 5% increase for the whole year.
Image source: Getty Images.
Teaching an old dog industry some new industry tricks
It's OK to remain bullish because there's a lot still going right at Chewy. A steady part of its model is Autoship, where customers receive a discount by subscribing to receive shipments at predetermined intervals. Autoship revenue now accounts for a whopping 76.4% of total shares and net sales rose 8% for the quarter, doubling its overall performance on the top line.
Chewy customers -- the ones that stick with it, at least -- are leaning more on the platform. Net sales per active customer rose 12% to $555 for the entire fiscal year, outpacing the 10% overall gain in net sales. Chewy's active customer count has dipped nearly 2% to 20.1 million, a figure that will have to start growing again if it wants to turn market sentiment around.
There are other revenue streams in which Chewy can doggy paddle. It launched in Canada in the second half of last year and recently announced a push into the veterinary care clinics, a move that will expand its total addressable market by roughly $25 billion.
Chewy is cautious about its performance, in particular, and pet food companies, in general, this year. It's more upbeat about the market normalizing next year.
In the meantime, the stock is trading at an enterprise value that's just 0.6 times trailing net sales and 31 times forward adjusted earnings. Challenges remain to attract new customers, but the Autoship penetration rate confirms that its existing following of pet parents is solid. Better days could be ahead for Chewy's ugly stock chart.
