Chewy's (CHWY +1.66%) revenue has soared over the past few years, thanks to the e-commerce company's popularity with pet parents. The company sells almost everything they need, from food and toys for their furry friends to medication and pet insurance. Recently, Chewy even expanded its e-commerce shop into Canada, another promising market, and launched its first veterinary clinics in the U.S.
All this helped Chewy report almost $3 billion in revenue during the most recent quarter and even declare a profit of $67 million. Even though Chewy's earnings are fantastic, though, one thing is limiting its profitability...
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A look at Chewy's profit
Let's take a look at profit. The chart below shows Chewy's levels of revenue and net income during the quarter. Why such a huge difference between the two numbers? Chewy, like any company, has a variety of expenses that enter the picture. But one in particular is significant, limiting profit by quite a bit. I'm talking about the cost of goods sold, which totaled $2 billion in the quarter.
Data source: Chewy.
Cost of goods sold includes all the expenses involved in producing the items Chewy sells. This means that to maintain and increase profitability, Chewy must focus on increasing the number of items it sells and keeping its costs down. So far, it has managed to do this, and two points give us reason to be confident this will continue.
Chewy has reached such levels of revenue by developing a loyal customer base, customers who keep coming back. We know this because Chewy's Autoship service -- one that automatically reorders and ships customers their favorite items -- makes up more than 77% of Chewy's net sales. Chewy's active customers' spending has also progressively advanced from year to year.
Chewy's gross margin has also been on the rise, and today stands at 29.7%, up from 28.4% during the year-earlier quarter.
So, yes, Chewy's cost of goods sold is a big expense, but the company has managed that -- and delivered profit growth. That, and many other factors, make it a great long-term buy today.
