Chewy Stock Shows Signs of Recovery Amid Challenging Past

Chewy’s stock (NYSE: CHWY) has garnered considerable attention with a remarkable 47% increase over the past year, reaching approximately $32 as of December 18. However, this rise comes after a steep decline of 73% from its peak of around $120 in February 2021. Currently, the stock is trading below its June 2019 initial public offering price of $35. The surge in pet adoptions during the pandemic has since returned to below-average growth rates over the last three years. Despite this, Chewy has recently reported an uptick in pet adoption rates and a growing customer base, contributing to increased sales per active customer in their latest Q3 results. Additionally, the company has released a promising revenue forecast for the fourth quarter, suggesting a significant acceleration in growth. We explore these developments further below.

Strong Q4 Projections and Revised Guidance

The company anticipates Q4 sales to rise by about 13%, estimating a range between $3.12 billion and $3.18 billion, as it focuses on acquiring new customers. Chewy has also updated its full-year sales forecast, expecting revenue to fall between $11.84 billion and $11.88 billion, which indicates a 6% growth. This revision exceeds its previous estimate of 3% to 4% growth. Furthermore, Chewy has lifted its full-year adjusted EBITDA margin guidance to between 4.6% and 4.8%, surpassing the prior outlook of 4.5% to 4.7%. The company’s model efficiently automates the delivery of essential pet supplies, which constitute almost 80% of its total net sales. For those seeking a more stable investment option, the High-Quality Portfolio offers a performance record that outstrips the S&P 500, achieving returns greater than 91% since its inception.

Q3 Financials Show Progress

In Chewy’s fiscal third quarter, which ended in October, revenue increased by 5% year-over-year to $2.9 billion. This marks an improvement from the 3% growth seen in the first two quarters of the year. A major contributor was a 9% rise in Autoship sales, totaling $2.4 billion. The net sales per active customer also showed a 4% year-over-year increase, reaching $567. Despite a decline of 100,000 in active customers over the past year, Chewy welcomed 200,000 new active customers during this quarter. The gross margin expanded by 80 basis points to 29.3%, while selling, general, and administrative expenses as a percentage of revenue reduced by 50 basis points. Consequently, the adjusted earnings per share rose by 33% to $0.20, and adjusted EBITDA surged by 66% to $138 million. Free cash flow saw impressive growth, tripling from the previous year to $152 million, leaving the company with $507 million in cash and marketable securities and no debt.

Challenging Market Performance

Despite recent gains, CHWY stock has underperformed compared to the broader market over the last three years, featuring returns of -34% in 2021, -37% in 2022, and -36% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio has consistently outperformed the S&P 500 during the same period. Why is this the case? The HQ Portfolio stocks collectively offer better returns with reduced risk compared to the benchmark index, providing a more stable investment experience.

Diverse Product Offerings

Chewy specializes in selling food and supplies for a wide range of pets, including dogs, cats, fish, birds, small pets, horses, and reptiles. The company is also expanding into new areas of the pet industry, such as personalized products, pet insurance, and telehealth services, allowing pet owners to consult veterinarians via phone or video.

[1] Returns as of 12/18/2024
[2] Cumulative total returns since the end of 2016

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.