Chewy (CHWY 2.70%) has taken investors on a wild ride over the past five years. The online pet products retailer was spun out from PetSmart in 2019, and it soared from its initial public offering (IPO) price of $22 to a record high of $118.69 on Feb. 12, 2021.
But today, Chewy's stock trades at about $17. A $10,000 investment in its IPO would have grown to nearly $54,000 before shrinking back to $7,700. The stock lost its luster as growth cooled off and rising interest rates compressed its valuation.
Let's assess Chewy's near-term challenges to see if it can bounce back over the next five years.
Image source: Getty Images.
What happened to Chewy over the past five years?
Chewy's growth in active customers, net sales per customer, and total net sales accelerated significantly in fiscal 2020 (which ended in January 2021) as the pandemic drove more pet owners toward its online marketplace. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins also turned positive.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|---|---|
|
Active customer growth |
27% |
43% |
8% |
(1%) |
(2%) |
|
Net sales per active customer growth |
8% |
3% |
16% |
8% |
8% |
|
Net sales growth |
37% |
47% |
24% |
13% |
10% |
|
Adjusted EBITDA margin |
(2%) |
1% |
1% |
3% |
3% |
Data source: Chewy.
However, that growth spurt set it up for a tough comparisons in fiscal 2021 as the pandemic ended. That slowdown deepened in fiscal 2022 and 2023 as the number of active customers declined. The company mainly blamed that downturn on slower discretionary spending on pets in a tougher macro environment, but it also faces fierce competition from other online retailers like Amazon, which expanded its selection of private label pet products in recent years.
To offset its loss of active customers, Chewy is growing its net sales per active customer by promoting its higher-margin private label products, selling more ads, and expanding its Chewy Health Insurance plans for pets. It's still locking more customers into its sticky Autoship subscriptions -- which grew as a percentage of its net sales from 69% in fiscal 2019 to 76% in fiscal 2023.
The company also reined in its spending to stabilize its adjusted EBITDA margins, turn profitable on a generally accepted accounting principles (GAAP) basis over the past two years, and nearly triple its annual free cash flow (FCF) in fiscal 2023.
NYSE: CHWY
Key Data Points
Are Chewy's high-growth days over?
All of those bottom-line improvements are encouraging, but Chewy's high-growth days could be ending. The pet care market could still expand at a compound annual growth rate (CAGR) of 6.45% from 2024 to 2032, according to Fortune Business Insights, but that steady expansion probably won't satisfy growth-oriented investors.
On the bright side, analysts expect Chewy to still grow slightly faster than the broader market. From fiscal 2023 to 2026, they expect its revenue to grow at a CAGR of 7% as its adjusted EBITDA increases at a CAGR of 21%. Its stock looks reasonably valued relative to those growth rates at 21 times this year's adjusted EBITDA.
Where will Chewy's stock be in five years?
If Chewy maintains those valuations, matches analysts' estimates, and grows at the same rate for another two years, it could generate about $14.4 billion in revenue and $800 million in adjusted EBITDA in fiscal 2028. Assuming its enterprise value to adjusted EBITDA ratio remains roughly the same, its stock could more than double in five years.
That would be a good five-year return, but it would fall woefully short of its all-time highs. I'd also take those long-term estimates with a grain of salt unless Chewy can consistently gain new customers again. So for now, I believe Chewy will gradually rise higher over the next five years -- but it could underperform the market's higher-growth stocks.
