Can Pets Bring Profits?

The pet care market has grown to $261 billion in 2022. It is expected to grow 34% over the next five years to $350 billion, according to research from Common Thread. 

The online pet market has nearly quadrupled since 2013. 

One of the largest players in the space is Chewy’s (CHWY). It has been growing at a blistering pace. But as we’ve all learned in 2022, growth companies have fallen out of favor. 

Yet, shares of the company managed to rally after the company reported earnings a week ago, quite a departure from other growth stocks.

While Chewy’s stock consistently tops the list of pet-related searches by financial pros, the number of searches has faded as shares dropped.

Still, Chewy doubled revenues from 2020 to 2022.

But does it have something the other growth stories don’t?

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Chewy’s Business

Known for their excellent customer service, Chewy is an e-commerce retailer focused on providing pet food and treats, pet supplies, pet medications, and other pet-health products. The company offers pet services for dogs, cats, fish, small pets, horses, and reptiles via its chewy.com website. 

The firm has over 100,000 products it sells through its website, and works with over 3,000 partner brands.  

One of the key subscription services is known as Autoship. In Q1 2022, the program drove in $1.75 billion in revenues for CHWY. 

The Autoship program provides pet owners with an easy and flexible way to reorder their favorite pet needs. Autoship was approximately 72.2 % of total net sales. 

Financials

As interest rates and inflation climb higher, investors are paying closer attention to fundamentals.

A quick look at the capital structure, and we’ll see CHWY has $604.76 million in cash, total debt of $436.02 million, and a market cap of $12.11 billion. 

Revenues have nearly doubled over the last years, going from $4.8 billion in 2020 to $8.8 billion in 2022. Furthermore, CHWY has been able to improve its gross margin along the way. 

And although the company has a negative operating income, which means it isn’t profitable yet, the numbers have improved over the years. For example in 2020, the operating income was – $253 million, and now it’s -92 million (TTM).

The same can be said about the company’s earnings per share (EPS). While the number is negative, it has improved over the years. 

Of course, all eyes are on liquidity, financial health, and cash flow. Two metrics we’ll use to measure Chewy’s are the current ratio and the quick ratio. 

In Q1 2022, CHWY had a quick ratio of 0.43x. If a company has a quick ratio above 1, it means it has more quick assets than current liabilities. However, at 0.43x, CHWY falls short. 

During the same period, CHWY had a current ratio of 0.82x. Again, you want to see a number above 1 here. And CHWY falls short.

However, the company generates just shy of $200 million in operating cash flow with free cash flow ever so close to positive territory.

If the valuation is Chewy’s weakest area then growth is its strongest. 

Its been able to grow its revenue (YoY) 19.89%, and 46.59% over the last five years. 

Valuation

CHWY has negative earnings per share. And because of that, it has no P/E ratio. 

It is worth noting that the price to cash flow is expected to improve from the trailing 12 month period into the next year. However, at 42.56x forward cash, it’s still pretty high.

While there isn’t an online retailer like CHWY to compare it to. There are several e-commerce sites getting into the space, including Amazon.com, Etsy, and Target.  

CHWY has weak profitability numbers compared to ETSY, TGT, and AMZN. 

However, things do look better when you start comparing growth.  

CHWY is growing its revneus faster than ETSY, TGT, and AMZN. 

Our Opinion – 5/10

CHWY is in a tough position because there is nothing proprietary about what they do. That means better-run businesses can come into the space, and start taking market share. 

Of course, we don’t expect the pet care market to be a winner take all space. But Chewy’s has weak fundamentals for this type of market.

And despite shares being down more than 50% YTD, we don’t think you should be in a rush to buy this stock. 

We’d wait for the company to continue to show improvements or if the economy shows signs of strengthening.