Chewy (NASDAQ:CHWY) investors have been barking up the wrong tree with the pet food and supplies retailer. Following the pandemic, Chewy stock has lost more than 80% of its value. In April it hit a new, all-time low.
When people were in lockdown mode, they bought pets and then splurged on food, toys, and accessories. Afterward, though, they pulled back on their spending as inflation roared to 40-year highs and the Federal Reserve kicked off an unprecedented series of interest rate hikes.
While Chewy stock has bounced 55% higher from that low point, shares are down from last month’s peak. Yet shares look ready to chew up the markets again. As the pet care market continues to grow, Chewy should benefit from the increased spending.
A Viable, Long-Term Growth Market
According to the American Pet Products Association, United States petcare spending will rise to $150.6 billion this year, a 2% increase from the $147 billion they spent in 2023. Pet parents will spend the largest portion on food and treats, some $64.4 billion. Another 25%, or $38.3 billion, will get veterinarian care and products.
The ongoing humanization of pets makes Chewy a long-term growth stock. The online pet products retailer generates most of its revenue from the sale of premium pet food, pet products, medications, and other pet health products. Citing Packaged Facts data, Chewy notes that 74% of pet owners are “willing to pay more for foods with extra health and wellness benefits.”
Chewy had $11.1 billion in sales in 2023, up 10% from the year before. Net sales were up 3% in the first quarter to $2.9 billion. Trailing 12-month sales were 7% higher suggesting spending is ramping up again.
While premium food is a major category for the online retailer, the rising importance of pet health has not been lost on Chewy. While it has long sold pet meds, in 2020 it launched its Connect With a Vet telehealth service for customers, which is free for its auto-ship subscription members. In 2022, it created Careplus, an insurance and wellness suite of products. Now it is going even further.
The Doctor Will See You Now
In the first quarter, Chewy opened its first four branded vet care clinics. They offer pet health services including routine appointments, urgent care, and surgery. It features a proprietary technology platform that seamlessly and efficiently connects pet owners and vet care providers.
According to the Bureau of Labor Statistics, veterinarian jobs are expected to increase about 20% from 2022 to 2032, a much faster rate of growth than all other jobs. Chewy’s ability to tap into this hot, growing market should be a strong tailwind for revenue and profit expansion.
Not that it comes without cost. Transitioning from an online retailer to one with a physical presence can be expensive. Capital expenditures jumped 35% in the first quarter to $29.3 million. It resulted in a 59% decrease in free cash flow for the period.
Yet it represents a unique opportunity to cash in on a higher margin growth vertical that should bolster its business down the road.
Not Cheap but Worth It
Chewy stock still looks expensive on a price-to-earnings, price-to sales, and price-to-free cash flow basis. Yet with inflation muted and interest rates set for a cut, Chewy’s sales and profit margins should rise.
The pet retailer also recently expanded into Canada. And like so many other companies looking to cash in on the rise in digital ad spending, launched its own advertising platform. As a niche retailer, it could attract marketers and advertisers seeking to target a narrow channel.
It likely won’t be a massive revenue contributor but could provide Chewy with incremental revenue growth.
Because of the long-term growth runway of pet ownership and care, expect Chewy stock to fetch a better price in the quarters ahead.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
