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Chewy: Robust Advancement, but Margins Remain Thin

(C) Reuters. Chewy: Robust Advancement, but Margins Remain Thin

Chewy (NYSE:CHWY) strives to be the most entrusted and convenient online shop for pet owners worldwide.

The company believes that it is the dominant online source for pet products, supplies, and prescriptions.

Chewy went public just over two years ago, while its revenues have been growing sequentially every single quarter as far as our available financial data goes.

Since pet owners need a consistent supply of food and pet care products, the company’s net revenues are extremely consistent. In fact, around $1.5 billion out of Chewy’s $2.16 billion in revenues in its most recent Q2 results were defined as Autoship Customer Sales.

Chewy defines Autoship customers as those for whom an order was shipped through its Autoship subscription program during the preceding 364-day period.

The subscription service provides pet owners with convenient and adjustable auto-reordering and deliveries, meeting their recurring needs and smoothing out Chewy’s cash flows.

On this basis, Chewy has developed a fantastic platform, which has been built on an element of trust. This should be considered as a great competitive advantage in an ultra-competitive industry, as Chewy should be able to enjoy solid customer retention going forward.

For context, Chewy ended Q2 with 20.1 million customers, a 21% year-over-year growth, or 29% on a two-year CAGR (compound annual growth rate).

Gross customer additions ran higher than their pre-pandemic levels, but still below the company’s record levels last year. This makes sense as orders peaked during the lockdowns, and investors should not consider the 21% figure as a potential slowdown.

Management’s Q3 guidance points towards revenue growth of 24% in the midpoint. That should reassure investors that growth is to remain robust and not decelerate further, as bears could argue.

I am neutral on the stock, despite Wall Street’s bullish consensus. (See CHWY stock charts on TipRanks)


The pet industry is extremely competitive, and margins generally remain thin, especially when it comes to resellers.

Despite the company scaling, gross margins have yet to surpass 28%, while with the additional selling, administrative, and operating expenses, net margins are borderline positive.

The company could potentially see net margins in the range of 5% to 10% as its subscription base grows, but it’s very unlikely that Chewy will become highly profitable, at least over the next decade.

The company’s current and forward P/Es come out as meaningless due to the borderline positive EPS. Still, if we were to use analyst estimates, which expect rapid profitability growth in the medium-term, their projections point towards FY 2025 EPS of $1.60.

In other words, investors are currently paying 46 times for FY 2025’s potential net income.

Wall Street’s Take

Turning to Wall Street, Chewy has a Moderate Buy consensus rating, based on 10 Buys, six Holds, and zero Sells assigned in the past three months. At $95.79, the average CHWY price target implies 29.7% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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Chewy: Robust Advancement, but Margins Remain Thin

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