Categories Analysis, Consumer

Chewy (CHWY): Three factors that make this stock a good one to consider

For the second quarter of 2021, Chewy expects net sales to grow 26-28% YoY to $2.15-2.17 billion

The pet care industry gained significant traction amid the pandemic as people started adopting and spending more on pets. Chewy Inc. (NYSE: CHWY) is one of the companies that benefited from this trend. Its shares have gained 74% over the past 12 months and 13% in the past one month. The general sentiment on the stock is bullish and here are three reasons why it is a good one to consider:

Strong fundamentals

Chewy has seen net sales grow consistently over the past three years going from $3.5 billion in 2018 to $7.1 billion in 2020. Looking at the past five quarters, sales have steadily increased on a sequential basis. In the first quarter of 2021, net sales rose 31.7% year-over-year to $2.14 billion, helped by increases in active customers and net sales per active customer (NSPAC). Autoship customer sales increased 34.4% YoY in Q1. The surge in ecommerce during the pandemic also helped fuel Chewy’s growth.

Despite incurring losses, Chewy managed to narrow its net loss over the past three years and the company went on to deliver a profit in its most recent quarter. In Q1, Chewy reported net income of $39 million compared to a net loss of $48 million in the prior-year period.

For the second quarter of 2021, Chewy expects net sales to grow 26-28% YoY to $2.15-2.17 billion and for the full year, the company expects sales to increase 25-26% YoY to a range of $8.9-9.0 billion.

Growing customer base

Chewy continues to gain new customers as well as grow their share of wallet. Over the past two years, the company has grown its active customer base by 8.4 million, or 75%. Chewy had a total of 19.8 million active customers at the end of Q1, which was up 31.6% YoY.

Although new customer acquisition has moderated from the peak levels seen last year during the pandemic, they still remain above pre-pandemic levels and the company’s retention rates are also stable.

Net sales per active customer rose 8.7% YoY to $388 in Q1, driven by improved merchandising and growth in high-margin verticals. The company’s expansion into verticals like fresh pet food and pet healthcare could help drive growth in the customer base going forward. Within pet healthcare, offerings like Petscriptions, Compounding and tele-health are garnering good responses from customers.

Market opportunity

The pet care industry is witnessing rapid growth and this trend is expected to continue in the near term. According to a report by Global Market Insights, the pet care market size was valued at over $232.3 billion in 2020 and is projected to grow at a compound annual growth rate of 6.1% over the next six years to reach $350.2 billion by 2027.  

Chewy has ample opportunity to grow and its efforts in expanding into high-margin verticals and launching new offerings will prove beneficial in the long term. According to TipRanks, Chewy holds a Strong Buy rating and has an average price target of $110.38, which represents an upside of 30% from the current level.  

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