Why Chewy Stock Could Be a Buy in the Coming Weeks

Online pet retailer Chewy (NYSE: CHWY) thrived at the pandemic’s onset as an increased share of consumer spending moved online and folks brought home more pets. Those trends boosted sales while attracting millions of new customers. Fortunately for Chewy, those benefits are not reversing as economies are reopening.

However, Chewy is grappling with the secondary consequences of the coronavirus pandemic. Supply-chain disruptions are limiting output just as consumer demand is surging. That’s causing widespread inflation and making it difficult for Chewy to fulfill robust customer orders.

Chewy is reporting first-quarter earnings on June 1. The temporary headwinds could cause it to announce disappointing figures, driving its share price down. It will be an excellent buying opportunity for long-term investors if that does happen.

Image source: Getty Images.

Chewy is benefiting from increased pet ownership

In the two years since the outbreak, Chewy has increased sales by $4 billion, or 83%. Consumers brought home millions of new pets to make time spent at home endurable. The good news for shareholders is that pets are a long-term commitment. As they get older, they will eat more, destroy more toys, and require owners to sustain spending. Therefore the boom that Chewy experienced during the pandemic could have long-lasting benefits.

Indeed, in that same time, Chewy added 7.2 million new customers — a 54% gain. One feature Chewy customers love is the autoship option. Folks select the items they wish to buy and how often they want to receive them (once per month, per week, etc). In its most recent quarter, 70.2% of sales came through the autoship program. For shoppers, this removes a task from their to-do list and ensures they never forget Rover’s food.

For Chewy, this reduces business risk because it gets insight into what shoppers are going to buy ahead of time. Chewy won’t buy inventory it does not expect to sell, lowering the chances of getting stuck with unwanted products it has to discount to get rid of.

CHWY Operating Margin (Annual) data by YCharts

Overall, Chewy has made excellent progress in capturing a meaningful share of the $120 billion pet market. Sales have grown from $2.1 billion to $8.9 billion from 2018 to 2022. Simultaneously, Chewy has narrowed operating losses and demonstrated economies of scale.

Further stock weakness could be a buying opportunity

That’s all great news, but Chewy faces powerful headwinds in the near term. Supply-chain disruptions are causing many items to be out of stock at Chewy, forcing it to miss out on sales. Meanwhile, it has to pay higher prices for labor, inventory, transportation, and more. The inflationary pressure caused its gross profit margin to decrease year over year in its most recent quarter. The cost increases could get worse in the near term as fuel prices have surged since the Russian invasion of Ukraine.

CHWY PS Ratio data by YCharts

Those forces could cause Chewy to report worse-than-expected sales and profits for Q1 on June 1. Chewy’s stock is already down 80% off its high. It would not be surprising for it to fall even further if the headwinds are indeed worse than expected. If this scenario plays out, it could be a buying opportunity for long-term investors. Chewy is already trading at its lowest price-to-sales ratio in years. A stock price fall following Q1 earnings could provide an even bigger bargain.

The near term will remain challenging for Chewy as it grapples with the aforementioned headwinds. However, its longer-term prospects are solid as it grows revenue, expands margins, and adds millions of customers who spend more with Chewy every year.

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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