Chewy: Buy, Sell, or Hold?

Chewy (NYSE: CHWY) has made headlines recently on the news that Keith Gill, who rose to fame through his Youtube channel, Roaring Kitty, made a Securities and Exchange Commission (SEC) filing revealing 6.6% ownership. Gill was previously known for his posts that helped turn GameStop into a meme stock .

Chewy's stock has been on a wild ride since its 2019 initial public offering. The share price has dropped precipitously after a tremendous rise during the early days of the pandemic as pet adoption took off. Since the start of 2020, the shares have lost 8% compared to a 74% gain for the S&P 500 .

But you should base your decisions on a strong long-term investing thesis. After all, it's nearly impossible to know how a stock will trade in the short run. On this basis, does Chewy merit an investment?

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Consistently growing demand

Chewy, which began operations in 2011, sells pet products, supplies, and prescriptions online. This is a good, steady business since pet owners tend to spend money on their beloved animals no matter what's going on with the economy.

Pet spending grew 78% from 2013 to 2021. During this span, entertainment expenses rose 47%, according to the U.S. Bureau of Labor Statistics. Even during the severe recession spanning 2008 to 2010, pet spending increased 12% while many other categories fell, according to the American Pet Products Association.

Beyond the market opportunity, Chewy has competitive advantages. This includes a major online presence and strong customer service that serves shoppers well.

Deeper engagement

The number of active customers has dropped somewhat, going from about 20.7 million at the end of fiscal 2021 to 20.1 million as of 2023. It finished the latest quarter, which ended on April 28, with slightly under 20 million. But I'm not concerned by this slight decline since customers have been spending more. Sales per active customer rose from $434 at the end of 2021 to $562 in the first quarter.

Additionally, Chewy's autoship customers continue to account for a larger portion of overall sales. These customers, who pay for a subscription, were 77.6% of total sales. And sales to autoship customers grew 6.4%, more than double the overall company's 3.1%. These tend to have higher retention and order more, according to management.

Chewy's first-quarter profit under generally accepted accounting principles (GAAP) nearly tripled to $66.9 million.

The decision

Chewy has grown profits and will pursue opening veterinary centers, which management believes is a large opportunity. While the shares have lagged, it looks like they trade at an attractive valuation.

The stock trades at a price-to-sales (P/S) ratio of 1. In early 2021, the shares had a P/S multiple over 6, and it was about 2 at the start of 2023. Meanwhile, the S&P 500 trades at a P/S ratio of 3.

Chewy's shares may experience volatility, especially given Gill's involvement. However, given its core pet business and autoship program that should help create loyal customers, the stock looks like a buying opportunity, particularly for long-term value-oriented investors .

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy .