It has been a volatile period for Chewy(NYSE: CHWY) stock, but most of the past five years have been negative for its shareholders. The pet supply giant was briefly a Wall Street favorite when the use of e-commerce soared during the early phases of the pandemic. Shares quickly reversed course once the growth hangover struck, though.
Chewy stock is now down by more than 80% over the past five years after having jumped by 70% through early 2021.
Yet, investing is all about the future, and the future seems brighter for this e-commerce specialist. Chewy has a good chance of boosting its sales footprint even as it makes its business more efficient.
Mixed results
There's no doubt that Chewy's business is experiencing challenges right now. Sales growth has slowed to a relative crawl, with revenue rising just 8% in the most recent quarter. It wasn't long ago that it was expanding at an over 20% rate. Chewy's active user pool shrank over the past year, too, and it's hard to see it as a growth business while that key metric is falling.
Yet, this has been an unusual time for the pet food industry. The pandemic clearly pulled forward some of Chewy's growth as it gave pet owners an unusual incentive to switch to its delivery model.
However, there's been no fundamental shift in the wider pet supply segment's outlook. The industry is on track to grow at between 5% and 7% annually over the next several years, compared to 10% during the pandemic and 6% in the pre-pandemic days. Chewy's main challenge will be to keep winning market share through the slowdown over the next few years.
Reasons for optimism
Growth over the next few years will need to come mostly from Chewy's established U.S. retail market but also from its newer pet healthcare business and its expansion into international markets, starting with Canada. The chances for better investment returns will rise if the business pairs rising average spending per customer with a steadily increasing shopper base. It's missing one-half of that formula these days, but average annual spending is at least strong at over $500 per active customer.
Chewy's is also on a rock-solid financial footing, which gives management the flexibility to invest aggressively in growth initiatives. Gross profit margin is excellent and rising, cash flow is solidly positive, and the company generated a tiny net profit over the past nine months. Yet, Wall Street is unlikely to reward Chewy if it can't push its profit margins toward double-digit percentages.
What to watch in late March
Investors will have a better idea about Chewy's short-term growth opportunities after it announces fiscal fourth-quarter results in late March. Analysts generally are expecting to hear that sales rose at a 10% pace for fiscal 2023, and they anticipate a slowdown to about 5% gains in the fiscal year that just started. The earnings outlook is just a bit brighter.
The prospects don't look great, then, for shareholder returns over the next five years. That's true even though Chewy's stock is valued so cheaply, having declined 60% in the last year. Modest steps toward higher profits and faster growth might be enough to give the stock a lift.
Yet, Chewy's business will have to make some fundamental shifts in its engagement trends to win its way back into Wall Street's good graces. Investors are hoping that the first step toward making that bullish scenario a reality will arrive with the company's March 20 earnings update.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
