Ever since I heard The Motley Fool's co-founder, David Gardner, talk about the Garner-Kretzmann Continuum on his Rule Breakers podcast, I've been a follower of the GKC's main principle: own at least one stock for each year of your age. Not only have I done this for myself, but also for my daughter, as I build her a portfolio of businesses she likes. Recently turning 10, it was time to add a new stock to her portfolio.
After we kicked around a few ideas like Nintendo, Mondelez, and even Rocket Lab USA, she decided Chewy (CHWY 2.48%) would be her pick.
Image source: Getty Images.
Chewy: The leading pet goods e-tailer (and more)
After debuting on the public markets in 2019, leading pet goods e-commerce specialist Chewy rocketed to $100 per share by 2021. In the process, the stock got way too far out over its skis, valuation-wise, and dropped to around $15 over the next few years.
Despite its share price's wild ride, Chewy's actual operations only got stronger. Sales quintupled. The company's gross profit margins soared roughly 10 percentage points. Its net income and free cash flow margins turned positive. Most importantly perhaps, its active customers doubled from 10.6 million in 2019 to 21.2 million today.
Now down 32% from its 52-week high despite delivering perfectly acceptable earnings, it looks like an excellent time for my daughter to buy the stock.
NYSE: CHWY
Key Data Points
Daughter-level reasoning for buying Chewy
For a girl who loves the dogs in her life and always looks forward to buying them treats and birthday presents, Chewy is a natural fit for her portfolio. While this might sound overly simplistic, that's the idea -- at least as far as opening her eyes to the world of investing. If it doesn't come from a place of fun, it probably won't be worth remembering.
In simplest terms, Chewy is a feel-good stock for her, so in that way, I think it represents her "best vision for the future," as David Garner teaches to optimize for when picking stocks. Furthermore, while a stock like Rocket Lab would be a fun holding for her, its complexity exceeds that of Chewy's, making the pet-goods retailer easier to learn about.
Dad-level reasoning for buying Chewy
My favorite reasons for picking Chewy as a holding with my daughter are that it does the simple things right, such as:
- Refunding purchased food from a customer whose pet has passed away, and letting them donate the food
- Sending care packages to customers in situations like these
- Enabling the scheduling and delivery of bulk food items (and other repeat purchases) for customers via automatic shipping
- Creating Chewy+, a rewards program for its most loyal customers
- Building a one-stop shop for pet owners, ranging from food and medicine to toys, insurance, and even physical veterinary clinics
While the company's 8% sales growth in its last quarter isn't as electric as its 20% annualized mark in the previous five years, Chewy's profitability could soon boom. As the company leans into higher-margin opportunities like streamlining Autoship, Chewy Vet Care, Get Real (its private-label brand), advertising, and Chewy+, Chewy could quickly grow into its valuation of 26 times forward earnings.
With any luck, Chewy will be an outperformer in my daughter's portfolio when she takes it over.
