Pets.com was one of the most spectacular failures of all time — bankrupt just nine months after its IPO. So why is Chewy (NYSE:CHWY) stock such a hot commodity?
Its success so far shows that investors in Pets.com — most notably, Amazon (NASDAQ:AMZN) — weren’t wrong. They were just early.
“People weren’t online. They were using dial-up. They weren’t comfortable putting their credit cards online. But over time, so much changed…you could suddenly ship 30-pound boxes from most of the country overnight,” Chewy founder Ryan Cohen told TechCrunch earlier this month.
Today, Chewy certainly ships plenty of them. The online pet supply store did $3.5 billion in sales last year. When you compare that to some of this year’s other mega-IPOs, that’s more than Lyft (NASDAQ:LYFT), Pinterest (NYSE:PINS) and Beyond Meat (NASDAQ:BYND) combined.
Here’s another factor that might be helping Chewy stock attract big money (like hedge fund Lone Pine Capital):
Chewy is operating in a growing, recession-proof market — pet care — without much competition.
Ask any pet owner: their “fur babies” are viewed as part of the family. They continue to spend even in a bad economy. According to the American Pet Products Association, from 2008 to 2010, pet spending actually increased by 12%. And online pet spending is set to grow at a 17% CAGR from 2016 to 2022, reports Chewy in its SEC Prospectus.
PetSmart would be the only real competition for those dollars. But having bought Chewy in 2017, PetSmart is playing on the same team; it still holds 70% of overall shares and 77% of voting shares after the Chewy IPO.
Chewy’s biggest competitor is Amazon. And so far it’s holding its own.
CHWY Stock By the Numbers
Sales growth has been parabolic ever since Chewy’s founding in 2011. At the same time, it’s already a tennis ball’s throw away from profitability: just 2.7% in the red last year.
Source: Chewy, Inc. SEC Form S-1
And within its $3.5 billion in sales, two-thirds were from its auto-ship program.
Other companies dream of having — and keeping — more than $2 billion in automatic sales. Last year, sales from Chewy’s existing customer base gained 120%.
In a world where you can hardly compete with Amazon on much else, Chewy is distinguished by a relentless focus on the customer. You can talk to one of its “online pet experts” 24/7. Plus, their personal touch is legendary on social media. Just before the Chewy IPO, photos of a condolence card and hand-painted oil portrait honoring one customer’s beloved pup went viral.
Chewy’s founders set out to recreate the neighborhood pet store and the feeling of being helped by a fellow pet parent who you trust. If you can recreate that feeling online — well, that’s a recipe for a great subscription model.
Subscription sales are key, as anyone from Microsoft (NASDAQ:MSFT) to Unilever’s (NYSE:UN) Dollar Shave Club can tell you. And Chewy will do anything to keep you, from its refund policy and human touch, to letting you reschedule your auto-ship to tomorrow… no questions asked.
It’s a little tough to compete with Amazon on scale. But Chewy’s relationship to PetSmart (with its network of 1,600 stores nationwide) will help. Chewy is set up to deliver to 80% of Americans overnight and nearly 100% within two days.
We’re a long way from Pets.com and the other dot-com busts of the early 2000s. If there’s anything we know today, it’s that convenience is key — just ask Amazon and Netflix (NASDAQ:NFLX).
As long as Chewy can pull out all the stops to get the customer whatever they need, whenever they need it, it has got a business model that’ll be tough for anyone to crack.
As of this writing, Ashley Cassell did not hold a position in any of the aforementioned securities.
