Home to over 20 million active customers, pet e-commerce specialist Chewy (CHWY -1.33%) has quickly grown its share of the United States' $144 billion pet-retail industry from 6% in 2018 to 12% in 2023. Despite tripling its sales over this time, the company's stock remains well below its initial public offering (IPO) price.
While a good rule of thumb is to avoid stocks that have yet to return to their IPO price after five years, Chewy stands out as an exception to this theory for four key reasons. Here are the four reasons why I believe Chewy is worth buying like there is no tomorrow.
1. The steadily growing and resilient pet industry
Research firm Packaged Facts calculated that the U.S. pet market grew by 9% annually since 2017 and estimates it will continue growing by a 7% annualized rate through 2027. Helping to power these impressive growth rates is the pet humanization megatrend, which sees 96% of pet owners classifying their furry companions as family members.
Thanks to this strengthening pet-human bond, spending on pets has proven to be virtually recession-proof, as evidenced by the industry's growth during the Great Recession and the COVID-19 pandemic. This industry stability -- paired with the fact that Chewy generates roughly 85% of its sales from non-discretionary and health-related products -- should keep the company's business resilient regardless of the economy.
Best yet for investors, these aren't the only reasons that Chewy's sales should prove to be sticky over the long haul.
Image source: Getty Images.
2. Autoship equals 76% of Chewy's sales
Chewy's free autoship-subscription program now accounts for 76% of its sales, up from 66% at its IPO. This set-it-and-forget-it option for pet owners has proven to be a massive hit among customers, enabling them to schedule recurring purchases of food, treats, pharmaceuticals, or any other items they'll consistently use.
However, these growing autoship purchases are even more crucial for investors to note since they are highly predictable. This predictability is critical for Chewy as shipping heavy bags of dog and cat food across one of the world's largest countries is a dizzyingly complex task -- especially when trying to do so profitably.
Thanks to the predictability of Chewy's growing autoship sales, the company's logistical network has steadily become more efficient, with average miles traveled per package plummeting 28% in the third quarter of 2023. Bolstered by this streamlining efficiency across its network over the last few years, the company has started to generate consistent profitability and free cash flow (FCF).
CHWY Profit Margin data by YCharts.
These margins should continue improving as Chewy continues to grow its autoship subscriptions and expand into higher-margin areas like advertising, private-label products, pet services, and veterinarian locations.
3. Chewy's Vet Care expansion is much needed in the U.S.
Perhaps the most interesting of these higher-margin areas for investors to watch is Chewy's launch of its Vet Care business. Planning to open four to eight physical locations in 2024, Chewy and its veterinary ambitions may seem like a dramatic shift from its existing e-commerce business. However, there are reasons for investors to be excited.
First, Trade journal Today's Veterinary Business estimates that the average small-vet clinic in the U.S. generates a net profit margin of between 10% and 15%. Thanks to these attractive margins, private equity firms have stormed into the industry, spending around $45 billion since 2017 to acquire over 25% of the vet shops in the U.S.
However -- and to make a long story short -- many pet owners view these private equity owners negatively, believing they emphasize profitability over a pet's well-being. Ranked No. 1 on Forrester's Customer Experience Index, Chewy's beloved status in consumers' eyes should help the company compete strongly and bring in margins higher than its current retail operations.
Furthermore, besides possibly bringing in higher margins, Chewy's consumer-friendly Vet Care locations could be a great "top-of-funnel" to the company's omnichannel operations. Should Chewy's Vet Care clinics expand nationwide over the long term, they would have natural upselling and cross-selling potential with new consumers who come in for a one-time medical issue but leave with an autoship subscription.
4. Chewy's all-time low valuation
Despite growing revenue by 10% in 2023, Chewy and its valuation remain close to all-time lows, trading with a price-to-sales (P/S) ratio of about 0.6.
CHWY PS and Forward PE Ratio data by YCharts.
Similarly, analysts give the company a forward price-to-earnings ratio of only 21, highlighting their belief that Chewy's profitability will continue improving over the next year. Buoyed by a streamlining logistical network and array of growth areas in higher-margin channels, Chewy's operations leave me tending to agree -- especially when thinking about how things might be a decade from now.
Thanks to the combination of these four reasons, I'm happy to keep buying Chewy shares like there's no tomorrow.
