With over $11 billion in fiscal 2023 net sales, Chewy (CHWY 2.99%) is an e-commerce giant serving the pet industry. The company has amassed over 20 million active customers by offering fast shipping, focusing on customer service, and selling a wide range of products and services.
Chewy isn't a subscription service, per se, but it does provide an automated way to place repeat orders. This option is extremely popular. In the fourth quarter of its fiscal 2023, more than three-quarters of its net sales came from autoship orders.
Chewy was built to be an e-commerce platform. However, management is pushing to build some physical locations in Florida in the coming year. It's not uncommon for e-commerce companies to do this. For example, Amazon now owns brick-and-mortar convenience stores and grocery stores. And in 2016, Etsy experimented with a store-within-a-store concept in a Macy's.
However, the surprising part of Chewy's push into brick-and-mortar is that it has little to do with its retail business.
Chewy's surprising new business idea
In its Q4 letter to shareholders, Chewy's management said that within the next year, it will open four to eight veterinary clinics close to its headquarters in Plantation, Florida. These clinics will be called Chewy Vet Care.
"Our thoughtfully designed clinics will be unlike anything in the market," said CEO Sumit Singh on the Q4 earnings call.
According to various research reports, the pet clinic space is a growth market. A report from ResearchAndMarkets pegs the global space at $114 billion, and forecasts that it will grow at nearly a 7% compound annual rate through 2028. For its part, Chewy is only targeting the domestic part of that market, which it believes offers about a $47 billion opportunity.
This is a growing opportunity for multiple reasons. First, pet owners increasingly view their pets as part of their family. Consequently, they're willing to spend more on pet healthcare. Additionally, the adoption of pet insurance is going up, which is also leading to an elevated prioritization of pet health.
Therefore, Chewy appears smart to position itself to claim a piece of this growing pie. But I believe the company's foray into veterinary clinics is significant for another reason as well.
Is this Chewy's endgame?
In December, Chewy quietly unveiled new software products for veterinary clinics. With one of them, vets can access Chewy's catalog of prescription drugs and sell them to customers without holding inventory. Through this, vets can even earn residual commissions.
Its other product, the cloud-based platform Rhapsody, covers the management side of running a vet practice. It helps vets and their staff members manage pet health records, access Chewy.com's catalog, find relevant educational health content, and handle routine clinic needs such as scheduling, payment processing, and more.
According to Mita Malhotra (the president of Chewy's health division), the company's push into software opens up a new $11.5 billion market for it. But Malhotra also said that Chewy will use Rhapsody to manage its own clinics as well.
In other words, it appears that Chewy is growing its market opportunity by building complementary businesses. It already has its thriving e-commerce platform. But it intends to help grow e-commerce by opening its own clinics and providing software solutions to third-party clinics.
Not only could this help grow Chewy's e-commerce platform, but software and clinics are growing business opportunities in their own rights.
What it means for investors
As of this writing, Chewy trades at a downright cheap price-to-sales (P/S) ratio of 0.6 -- its lowest P/S ever.
CHWY PS Ratio data by YCharts.
This low valuation reflects the market's doubt that Chewy can grow. On the one hand, this is fair. After all, the company ended its fiscal 2023 with 20.1 million active customers -- down 3% from 20.7 million at the end of its fiscal 2021. Chewy has work to do in terms of getting its customer base back to growth.
On the other hand, its push into a variety of pet-health services is expanding its addressable market. This makes me hopeful that it will find a way to grow its top line for years to come.
For this reason, I believe that Chewy stock is a great opportunistic buy for long-term investors. The company is already dominating pet e-commerce, but could soon become a force to be reckoned with in other areas of the pet industry as well.
