Should You Invest in Chewy for 2022?

Online pet retailer rubbery (NYSE: you) It was a challenging year in 2021. The company boomed with the onset of the pandemic in 2020 when millions of people were looking to avoid traditional store shopping and turned to to cater to their pets.

However, as the economic reopening and vaccination campaign against COVID-19 gains momentum, customer acquisition growth at Chewy has slowed. As a result, its share price is down 34% in 2021. But as the saying goes, past performance doesn’t always indicate future results. So let’s take a look at Chewy’s business to determine if 2022 will be a better year for its investors.

Picture of a dog with its tongue out.

Image source: Getty Images.

Chewy is customer growth, revenue and profit margins

While Chewy’s revenue growth has slowed, it’s still growing well — up 27.4% year over year in the nine months ended Oct. Customers increase their spending at Chewy as the company expands its product assortment. In addition, the site adds new customers every three months.

Consumables is Chewy’s largest category with sales of $4.5 billion in the last nine months. That was up 25.3% from the same period the previous year and Chewy’s total sales accounted for more than two-thirds of Chewy’s total sales. Consumables include items such as wet and dry food for dogs, cats, and other pets and are usually things people need regularly. Since food is essential, Chewy’s work is more resistant to stagnation. Pets need to eat whether the economy is booming or bustling.

However, what a pet eats is a different matter. For your pet parents reading this article, you may have had experience with a dog or cat that only eats a certain type or type of pet food. So the more items Chewy carries, the more likely he is to get what pet owners are looking for and prevent those customers from going elsewhere. To that end, expect Chewy to add a variety of products, which will help increase sales.

Chewy’s management has also proven to be adept at acquiring and retaining clients. As of October 31, it had 20.4 million active customers, up 14.7% from the same period last year. In addition, each customer spends more over time. Net sales per active customer were up 15.4% to an average of $419 at the end of October.

Growth in customers and spending per customer enables Chewy to operate with increased efficiency. In 2016, Chewy reported a gross margin of 16.6%. So far in the nine months ending October 31, Chewy’s gross margin is 27.2%. This is particularly impressive given the inflationary environment all businesses face.

The reward is worth the risk in a rubber stock

Rising costs will make 2022 a challenging year for Chewy’s profit margins. The company’s outbound shipping contracts were reset higher in January and it will be headwinds from now on. On top of that, Chewy discovers that she needs to pay higher wages to attract enough employees to run fulfillment centers. Finally, product costs go up, and it remains to be seen if Chewy can redirect these price increases to customers without causing demand to drop.

However, the bad news may already be pricing in stocks that are down 34% in 2021. Today, Chewy is trading at a price-to-sales ratio of 2.6, less than half the high it was selling at its peak. At this low price, the potential reward of investing in Chewy shares outweighs the near-term risk. Long-term investors can feel good about adding Chewy shares to their portfolios in 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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