Investors may not know what to make of Chewy (CHWY -1.23%) stock. Although its sales have continued to grow, the stock has experienced declines amid a shrinking customer base and expectations of lower growth in its industry.
Nonetheless, Chewy has built a loyal customer base that spends increasing amounts on their pets. Also, with plans to expand into other markets and businesses, the stock could begin a long-awaited recovery.
Chewy's struggles
Admittedly, Chewy bears can make valid points for their lack of optimism about the stock. The customer base continues to shrink, with the company reporting around 20.1 million active customers at the end of 2023. This is down from 20.4 million in 2022 and 20.7 million the year before.
Moreover, the company had stuck to e-commerce until recently. This is both noteworthy and disappointing as successful e-commerce operations, even large ones like Amazon and MercadoLibre, have branched out into more profitable businesses.
Amid these challenges, Chewy stock has lost over half its value over the past year. Its relatively recent turn to profitability has left it with a P/E ratio near 175 although its forward P/E ratio is just 21, a record low for the stock.
A possible path to recovery
However, the low forward earnings multiple could make the stock attractive to investors, and not just because the stock is cheap. Despite the drop in the number of customers, net sales increased more than 10% to over $11 billion.
About $8.5 billion of those sales were autoship orders, which brings stability to its revenue stream and implies a high level of trust in Chewy's brand. Also, net sales per customer grew 12% to $555, indicating that its more personal touch helps it stand out over more transactional businesses like Amazon. Indeed, higher spending on operating expenses reduced net income, and Chewy earned a net income of $40 million in 2023, down from $50 million in the previous year.
With net sales growth expected to slow to the 4% to 6% range in 2024, some investors may be reluctant to add shares. Still, investors may overlook that higher spending on its investments. For one, Chewy expanded into Canada in September 2023. While it made little mention of Canada in its recent report, this is its first international expansion, and success there could lead to more market entries later, boosting profits over time.
Additionally, Chewy is working to diversify its revenue sources away from retail. The company announced that it is opening a chain of veterinary clinics. The first clinic opened in Plantation, Florida, in December near the company's headquarters, and it has plans for additional locations.
While it is too early to tell how this will affect the company's financials, a successful chain of clinics could give it a business with a higher gross margin and may reduce its reliance on lower-margin retail operations to succeed.
Should I buy Chewy stock?
Given the company's valuation and growth prospects, investors might want to consider a position in Chewy stock. Admittedly, a declining customer base and the uncertainty of its veterinary business may justify its lower valuation.
Nonetheless, the company has built a loyal base of customers willing to spend more on their pets. Also, attempts to move into Canada and enter related businesses such as veterinary services could potentially expand its margins and give it a growth catalyst outside of the competitive retail world. Such conditions could stoke a long-awaited turnaround in the internet and direct marketing retail stock.
