➡️ This is a step-by-step stock review to determine if Chewy (CHWY) stock is a good buy. In this article, we’ll help you understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
Chewy is an online retailer of pet food and products. The company was founded in 2011 and is based in Dania Beach, FL.
Table of Contents
- Step 1: Tykr Rating
- Step 2: Chewy Company History
- Step 3: Chewy Business Model
- Step 4: What makes Chewy Different?
- Step 5: Chewy News
- Step 6: Chewy Competition
- Step 7: Chewy 4Ms
- Step 8: Is Chewy stock a good buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make.
- Summary: On Sale
- Score: 84/100
- MOS: 90%
- Share Price: $33
- Sticker Price: $166
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
Step 2: Chewy Company History
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
- In 2011, the company was initially named “Mr. Chewy” by Ryan Cohen and Michael Day. The company hired former employees and executives from Amazon, PetSmart, Whole Foods Market, and Wayfair.
- In 2012, revenue reached $26M.
- In 2014, revenue grew to $205M.
- In 2015, revenue grew to $423M.
- In 2017, revenue grew to $2B and captured 51% of online pet food sales in the US. That same year, Chewy was on track to go public but both Petco and PetSmart approached Chewy with merger offers. Petco’s offer was part cash and part stock whereas PetSmart’s offer was all cash and allowed Chewy to remain a separate business. Chewy was officially acquired by PetSmart in 2017 for $3.35B, which at the time, was the largest acquisition of an e-commerce business. PetSmart later transferred 20% of its ownership stake in Chewy to private equity firm BC Partners, which has owned PetSmart since 2014, and also spun off an additional 16.5% of Chewy to an unstructured subsidiary in 2018.
- After the acquisition, Cohen remained CEO and operated the business largely as an independent unit of PetSmart.
- In 2018, revenues increased to $3.5B with 66% of sales coming from customers signing up for recurring shipments. That same year, Chewy launched Chewy Pharmacy, an online pharmacy providing pet-targeted prescription medications.
- In 2019, Chewy went public.
- In 2020, BC Partners separated PetSmart and Chewy in a recapitalization plan.
- In 2020, revenue grew to $7.15B.
- In Q4 of 2020, Chewy hit its first quarter of profitability.
- In 2021, revenue grew to $8.89B.
- In 2021, Chewy announced its expansion into medical insurance for pets.
- In 2022, CarePlus officially launched as a medical insurance product.
Step 3: Chewy Business Model
How does Chewy make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
Ecommerce – The majority of the revenue is generated through selling products. Chewy has over 2,000 brands and 55,000 SKUs. About 70% of the revenue is generated from consumable products and about 30% is from hard goods.
Autoship – Autoship turns Chewy into a SaaS-like model by introducing recurring revenue. Customers can receive up to 35% on the initial order and 5% ongoing. This feature allows products to be delivered automatically to your door once a month, or at a frequency you desire. 60% of the e-commerce revenue is driven by Autoship.
CarePlus – Chewy offers medical insurance for pets. This adds another complimentary recurring revenue stream to the business model.
Step 4:What makes Chewy different?
The key phrase is “customer service”.
Unfortunately, the human lifespan far exceeds the lifespan of our pets. Most pets maybe make it to their teens. We can say goodbye to pets multiple times over our lifespan. Fortunately, Chewy is doing its best to provide some empathy along the way.
This article from fortune.com talks about circumstances where customers have received everything from flowers, to personal letters, to even hand-painted portraits of their furry friends that have passed.
These small gestures of good faith go a long way. Not only does this make people feel better in painful times, but it can also make Chewy a lifelong pet store of choice. This is a reminder that customer service can truly separate you from the competition.
Step 5: Chewy News
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This article from zacks.com says Chewy is currently one of the most searched stocks at the moment. This is an easy-to-understand, pet-focused business with an EPS that has far exceeded expectations the last two quarters.
This article from seekingalpha.com talks about some of the pros and cons of Chewy.
Pros.
- They use enticing graphics and funny captions to create a different experience than what you would see with the competition.
- They are expanding fulfillment centers that support the autoship feature have enabled Chewy to emulate a SaaS business.
- They introduced “Goody Boxes” which sell treats and toys, a competitive product to BarkBox.
- They introduced CarePlus insurance. As we’ve learned from Warren Buffett and Charlie Munger, insurance is a strong business model as it’s both necessary and produces recurring revenue. (Berkshire Hathaway bought GEICO in 1996 and it’s proven to be one of their best investments to date.)
- Chewy has given back $100M to over 9,000 animal nonprofit organizations.
- The last two earnings reports exceed expectations by over 100%.
- Autoship sales have popped by 17%.
- Revenues have steadily increased year over year for the last 5 years.
Cons
- There are a lot of competitors including Petco (WOOF), PetSmart, and BarkBox.
- Supply chain issues may slow down sales.
This article from fool.com states that Chewy has managed to increase its profit margin in 2022 while most e-commerce companies have seen a decline. The key driver behind growing profitability is the autoship feature which generates recurring revenue.
For the latest news on this stock, please login to Tykr.
Step 6: Chewy Competition
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
Petco (WOOF)
- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $14
- Sticker Price: $14
- Revenue: $5.8B
Amazon (AMZN)
- Summary: Overpriced
- Score: 44/100
- MOS: 0%
- Share Price: $126
- Sticker Price: $127
- Revenue: $469B
There are also a lot of private competitors in this industry including PetSmart, BarkBox, PetLove, Petflow, Fidotek, and more.
Step 7: Chewy 4Ms
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✔️ MOS: With a score of 84/100, the overall financial strength of this company is outstanding and the MOS of 90% shows this stock has some upside potential.
✔️ Meaning: It’s a great sign with an e-commerce company can emulate a SaaS company. The autoship feature has made a significant impact on the financial health of this company. It’s also important to highlight the addition of CarePlus medical insurance for pets. Insurance adds another recurring revenue stream to the model.
❌ Moat: Chewy has a lot of competition. Unfortunately, pet food and toys are not hard to make. It’s also important to point out that Amazon offers a lot of the same products as Chewy, at very similar prices. Amazon also offers an autoship feature for 5% off on each order. Chewy also only serves customers in the US. This creates a scale issue. We like to invest in companies that don’t have geographic limitations as it allows a company to scale revenue to much higher levels.
❌ Management: Sumit Singh has served as Chewy’s CEO since 2018. He was a key driver behind Chewy’s IPO. Prior to Chewy, he served in leadership roles at Amazon between 2013 and 2017. Some of his roles included Director of Amazon’s Consumable Business (fresh and pantry) and General Manager for Amazon’s North American merchant fulfillment and third-party businesses. Prior to Amazon, he worked in leadership positions at Dell. Although Singh has the right experience, Glassdoor tells a different story of what’s going on behind the scenes. The Glassdoor rating of Chewy is 3.4/5.0 and the CEO rating of Singh is 68%. Ideally, we want to see a company score greater than 4.0 and CEO rating greater than 80%. Overall, I think he has the technical ability to grow the company but he’s not building a strong culture. Lower ratings on the company and CEO mean higher turnover and a lack of motivation. Knowing that customer service is a key differentiator, if the employees are not happy, customer service will decline. If I were Singh, I would take immediate action on what leadership can do to improve the culture. A key reminder with servant leadership is employees don’t work for their leaders, leaders work for their employees. A leader’s job is to remove blockers and behavior that prevent employees from performing their job efficiently, effectively, and with positivity. If you have upset employees it’s most likely not the employees, it’s most likely you.
If you’re interested, you may complete your own 4M checklist on this stock or other stocks by logging into Tykr.
Step 8: Is Chewy stock a good buy?
The MOS and Meaning look great but the Moat and Management make this stock a risk. However, this stock is currently down 74% from its all-time high due to the bear market. When the market takes off, this stock may see some nice returns. If you’re looking for more short-term gains, this may be a stock to get behind but I would only allocate a small percentage (less than 5%).
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The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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