The Shares of Chewy Have Found themselves in Disfavor. Is it a Worthy Investment for 2025?
Chewy's (CHWY -2.19%) stocks have bounced back this year following a significant drop from their peak in 2021. Despite the major economic challenges impacting its sales, the pet care market might be shifting in a positive direction.
In the third fiscal quarter (ending Oct. 27), the company reported a 4.8% increase in sales compared to the previous year, marking an improvement from the 2.6% growth in the previous quarter. Future sales projections suggest a year-over-year revenue increase of approximately 6% for the full fiscal year, indicating strong growth potential in the final quarter.
Currently, the stock is trading at a reasonable price-to-earnings ratio of 25, based on this year's average earnings estimate. Driving long-term growth and making the stock an attractive investment for 2025 is Chewy's strategic approach.
Boosting recurring sales
One of Chewy's strong points is its efforts to generate a steady stream of revenue from loyal customers. This is being achieved through its Autoship program, membership services, and healthcare offerings. The growth of these recurring revenue streams might positively impact the company's profitability.
Autoship, which accounts for 80% of quarterly sales and increased by 9% year over year, is a significant contributor. Additionally, the company's paid membership program, Chewy+, is showing promising results. Users of this service are placing more orders and have higher cross-category penetration than nonmembers. Chewy+ members are also utilizing Autoship more frequently, further bolstering the company's repeat sales strategy.
Healthcare services provide another opportunity. Established in the market for years, Chewy is the largest pet pharmacy business in the U.S. The introduction of Chewy Vet Care, the company's own veterinary clinics, is expanding its addressable market.
The $25 billion opportunity in veterinary care demonstrates the potential for further investment in healthcare services to boost sales across the business.
Enhancing profitability and buybacks
Chewy is on a mission to develop a comprehensive ecosystem of pet care services. If the company can achieve broader profit margins and scale up in the coming years, the stock's value could skyrocket.
Since fiscal 2021, its gross margin has been consistently improving and is projected to reach a high of 29.2% in fiscal 2024 (ending January) -- a 0.8% increase from the previous year.
Management's increased stock repurchases is another positive sign. In the first three fiscal quarters, the company has purchased $875 million worth of shares, with $343 million bought in the third quarter. This indicates management's belief in the current stock values.
The competitive pet care market can be challenging, but Chewy's strategy of offering services that encourage repeat purchases from customers is compelling. Analysts predict rising earnings growth for the company over the next few years as margins expand. If the current momentum continues into 2025, the stock could hit new heights and deliver exceptional returns in the coming decade.
Given the improvement in Chewy's sales and the growth of its recurring revenue streams, such as Autoship and Chewy+, there's an opportunity for investors to consider investing in the company's stock. The strategic expansion into healthcare services and the potential for broader profit margins could further boost the stock's value.
As Chewy continues to enhance its profitability and has shown confidence in its stock by purchasing shares, investors might find it attractive to diversify their finance portfolio and invest in this growing pet care market.
