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Chewy: Buy The Dip

May 01, 2022 9:15 AM ETChewy, Inc. (CHWY)21 Comments
Gary Alexander profile picture
Gary Alexander


  • Shares of Chewy have declined 50% year to date as investors digested the impacts of the inflationary environment on Chewy's bottom line.
  • Gross margins have peeled back by roughly two points, driven largely by higher logistics and freight costs.
  • The company has implemented operational initiatives that should offset these price increases within two years, though as usual Wall Street is primarily concerned about today's earnings.
  • Trading at just ~1x forward revenue, Chewy is appropriately priced for its fundamental risks.
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Obedient welsh corgi pembroke lies on blue background, craft bags and box of tasty dried dog treats around. Advertising delicious healthy snacks for pets with packaging and home delivery

Ирина Мещерякова/iStock via Getty Images

During the height of the pandemic, there was no sector hotter than e-commerce; and now, in 2022, seemingly no investor will touch an e-commerce stock with a ten-foot pole. Chewy (NYSE:CHWY), the beloved

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This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CHWY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

Chewy understood market reaction and will improve margins significantly in the first quarter.
They stopped a new warehouse, no air traffic with dog and cat litters and reduced extensive advertising. Over time margins will increase over 31%.
Actually they have more buying power as Petsmart, Petco, Cosco, Walmart and Amazon.
Amazon made a huge loss last quarter, has also to look for more profitability and will so stop aggressive pricing.
So I see a very positive outlook.
Read the comments. Only people who have positive expectation are the bag holders who have hard time coming to terms with their losses and who have difficulty understanding money-losing businesses are not good investments UNLESS the Fed is doing that mega vega exponential QE-unlimited
Freight cost spike is temporary? What is your evidence? If anything gas and labor prices have been shooting higher and higher. If 2021 was challenging for chewy, I wonder what they would call 2022
CHWY is an online pet food company , not a a high tech growth stock. It does not deserve a high P/e
. It’s policy of buying sales via no -low margins may have impressed Wall St in the past , but does not now.
Nevertheless it represents a good trade in the 18 area. Be patient and do not pay up
@r cohn why $18?
Every day there is a new dip. Now value is below 2022 revenue. Estimate only 90% of revenue.
Consumers have less to spend due to 8% inflation. Due to high oil and gas prices FedEx in Q4 and from Q1 onwards will cost 150 basics points more. CEO told to have savings which equalize this.
It will not get totally but help to get margins from 25,4% in Q4 to 26 in Q1 and perhaps 26.5 % in Q2 and that is break even and will be enough to stop cash burn.
Some time in the future this stupid war will end and gasoline prices will normalize then Chewy can earn 2-5% of revenue.
My revenue projections 2021 9 billion, 2022 10.8 billion , 2023 12.5 and 2024 14 billion of total 140 billion dollars.
kpmedia profile picture
@blaumeise "Consumers have less to spend due to 8% inflation. "

While I have less money, that hits my discretionary budget, and this is a pet staple. Dogs still have to eat, cats still have to poop, etc. So I'm not sure how your statement applies here.
@kpmedia consumers will have to save and so use every bargain they can get.
Amazon made some deep discounts which will eat into Chewy's revenue. So my conclusion is that Chewy will grow only 15 to 20% instead of 30-40%. Amazon, Walmart, Costco and Petsmart all will fight with bargains for customers.
Chewy's buying power next year in the US will increase from 6 .5 billion to about 7.5 billion that is already very competitive and gives them an edge over all competitors.
kpmedia profile picture
@blaumeise I agree with your conclusion, they will gain more and more advantage over competition on an annual basis. It's been happening, and will keep happening.

But "competition" sometimes strikes me as daft in these SA conversations. That happens far too often here. Comparing every to a FAANG stock, mostly.

If you ever watch Amazon loss-leader discounts, they tend to reverse hard, or end up as a discontinued product. But I've not seen anything at Amazon less than Chewy, and several items are more expensive. They don't carry many things Chewy does, and instead carry super cheap Chinese made crap in its place, much like Walmart. For example, they stock some very questionable cat inhalers that don't work as per the reviews, while Chewy only carries the reputable item suggested by vets.

Walmart is such a horrible places to shop. Finding items in stock there, either B&M or online, is often 50/50. At least online, no wasted gas, just wasted time.

Petsmart and Petco are competitors, but mostly just for the B&M. The online presence is just so stripped compared to Chewy, and usually more expensive by as much as 15%. But when you're not in a large city, and with either being close and convenient, it's still not really an option, therefore not a competitor for that consumer.

From what I've seen, the only way to save money on pet food and supplies, more than Chewy, is to feed them crap (fat soaked cereal, aka off-brand dry food) and give them cheap Chinese items that may be not work or be dangerous. And you can use eBay for that.
Telehealth for pets is laughable. Pets can't tell a vet over Zoom what their symptoms are, so if the vet can't physically examine them, the appointment is a complete waste of time (and money).

Telehealth generally is great for medical professionals, who don't have to bother going to work, but a terrible deal for consumers of health care.

CHWY's main problem remains that even as they massively increase revenue, they keep generating losses. It's hard to see how they ever become consistently profitable. Note that AMZN is only ever profitable because of AWS. Will CHWY be starting a cloud hosting service? If not, they're likely to remain a non-profit charity for pet owners, rather than a profitable business.
SeattliteTrader profile picture
@HPBunker shipping 240lbs of cat litter to our place every few months for free can't help their bottom line, either... Great for us, but terrible from a business perspective unless they're making that up somewhere else. Oh wait, what about the other heavy stuff like cans of food, etc. Nope! No margin on our purchases!
Your point is one that was never made in the past and is just coming to the investors
Very few online businesses operate with high margins ; most have low margins - with rising costs of labor and fuel their margins are negative.
Online businesses , including AMZN do not deserve high P/Es
Started today with a position of 250. Let's wait and see.
Doba2 profile picture
Good points from the article.
These levels are starting to seem like a good entry but in this macro environment, I still can't bring myself to start a position in Chewy, although the valuation is getting my attention.
Still need to see a profit for at least 2 quarters in a row or the share price at $20 before I initiate a position.
Analyze This profile picture
White I just ordered some things for my dog a mere moment ago from CHWY, I'm not paying $12 billion for a company where break even consistent EBITDA after adjustments is possible in a few years. I personally think $2 billion is even over priced. While this stock is an easy pitch to pet owners, it's a tough sell to anyone who understands what makes a company worth something.... and this is profits. Dress it up all you want it's still a barely break even business with huge competition, thin margins butt has nice customer service.

At $10 the company is valued at $4 billion which is still expensive considering competition and cost will continue to increase and make profitability a far stretch.
Just because a stock is down a lot doesn't make it cheap.
kpmedia profile picture
@Analyze This What competition? The local B&M for those living in large cities? Or limited stock no-pharmacy Amazon?
Analyze This profile picture
@kpmedia You apparently have never Googled "Pet supplies".....and Amazon and WalMart is a major player on line. Furthermore, considering the prices are often the same.... Amazon is 5% cheaper if you use their free credit card.
kpmedia profile picture
@Analyze This What's Google? Duh....

Walmart mostly stocks cheap crap. If you want Fluffy to eat garbage and have a short life, well then I feel sorry for your pet. They also stock a lot of inferior (and questionable) meds and supplements. The online site has far too many overpriced "third party" sellers of goods, and too many Walmart goods are often out of stock, or only sold in store. Walmart is essentially a B&M. Prices at Walmart are not any better than Chewy, sometimes worse. Plus time, gas and the hassle of Walmart.

Target is a bit more upscale, some decent house-brand supplies (but not food). I've bought there, infrequently.

Amazon prices fluctuate daily, sometimes multiple times daily. Same for Amazon stock. Amazon is almost always the worst choice for pet supplies. So that 5% Prime Chase benefit is usually offset. (And the 5% isn't really all that special anyway. I get similar rewards from Discover, BofA, Citi, Synchrony, and Fidelity. Right now, I'm not even using my Prime CC, better returns elsewhere.)

The only "competitor" to Chewy really isn't a competitor right now. Traditional pet stores that finally got online, or finally got their crap together for the existing site. But they lag. However, most have higher prices. But at least these stores have a wide variety of food, pharmacy, supplies, unlike the big box stores.

CVET is pushing hard to get vets to partner with them, but I take a dim view of that company, and they're in lawsuits over those issues.

Again, the biggest catalyst is customer service.
- Walmart? HAHAHAHA! Hahahaha!
- Amazon? Pfft. Very mixed.
- Target? Not really. Mixed.
- Pet stores? Usually decent.
- Chewy? Impressive. Speechlessly so at times.
ndardick profile picture
Thanks for the opportunity to revisit CHWY after its price fell over 43% (from $47 to $29) during the past month. I am a loyal customer of CHWY but not a shareholder because I view its future profitability as elusive in a very competitive business when CHWY has an extremely high debt/equity ratio of 2,947:1 according to YahooFinance, even though you contend that CHWY is "unencumbered of debt". If you will excuse my sense of humor, I cannot get on the CHWY BANDWAGON because, as my Romanian gypsy ancestors taught me, YOU CANNOT SELL WHAT YOU DO NOT HAVE ON THE WAGON. Every time I call CHWY I am unable to buy many of the items on my list because they are not in stock, and CHWY refuses to allow me to "backorder" what they don't have in stock. Perhaps the well-known supply constraints are the primary cause of this imbalance, and these might indeed abate over time, but at the current time I am able to find the products CHWY cannot deliver at Petco, Target and CVS. Additionally, while I agree that CHWY has sufficient cash to survive for years at the current run rate of losses, I am skeptical of your contention that CHWY has been generating positive "adjusted" EBITDA when statistics on YahooFinance and SA do not agree with your contention. Adjusted for what, I would ask? I also note that the short interest as a percentage of the float is a whopping 32% (as of April 14). These short sellers see a far different situation and future prospects than you do. My own conclusion is that CHWY is more of a meme stock than a fundamentally solid investment choice at this particular time. What am I missing? Are the metrics that I see on SA and YahooFinance blatantly wrong?
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