Summary
Chewy has seen a real boom and bust cycle since the outbreak of the pandemic.
While the company has a few challenges currently, it has delivered on great growth and a bit of margin expansion in recent years.
I am starting to like the valuation here, after a great pullback seen as of recent.
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GlobalP/iStock via Getty Images Chewy ( CHWY ) has seen a real boom and bust cycle since the pandemic, with shares currently on its retreat. My last take on the business dates back from the summer of 2020 as I noted that sales were okay, but margins were not.
Ever since we have seen the passage of roughly one and a half year in time, within a time frame still dominated by the pandemic of course. This should in theory aid the company in delivering great results, but it seems as if investors have lost confidence as of recent. This pullback in the shares look compelling as Chewy has seen very decent revenue growth and margin expansion in recent years, albeit that some near term challenges have emerged. Former Take
Chewy is a household name in the e-commerce animal business. The company has been thriving on the back of the integrity of the business, as well as secular trends related to animal care and food, driven by demographic and social trends, as well as the pandemic of course. High quality and competitive pricing has been driven the success of the business, in part driven by a savvy and successful reordering program.
Founded a decade ago, the company has grown to $3.5 billion in sales in 2018, still being a relatively smaller player in a $100 billion target market. While the revenue base is large, the company still posted a loss of $268 million that year. In April 2020, just a few weeks after the pandemic was in full swing, the company posted its 2019 results with revenues up 40% to $4.85 billion for the year. EBITDA losses narrowed from $229 million to $85 million, which looked better than it is with net losses of $252 million being quite realistic if we include large stock-based compensation expenses.
The 401 million shares outstanding traded around the $50 mark in June, resulting in a $20 billion equity valuation. This was very large given the revenue base and the still very sizeable economic losses. Believing the company could grow to $10 billion in sales in 2025, operating earnings of 10% would only result in earnings of $800 million, or $2 per share, requiring flawless execution in order to trade at 25 times forward earnings, that is earnings five years ahead in time. This was not too compelling in my book. What Happened?
Since my cautious stance around $50 in June 2020, shares have been doing very well and actually rose to a high of $120 early in 2021 amidst the meme stock theme. Ever since we have seen a sizeable pullback again, with shares now back to $50 per share.
The company posted first quarter sales for 2020 up 46% to $1.62 billion, that is for the quarter ending early in May 2020, indicating the real extent to which the business benefited from the pandemic. Second quarter sales rose 47% to $1.70 billion as the company actually posted a positive EBITDA number of $15 million and change.
In September, the company actually believed that the valuation was quite high as well as it sold more than 5 million shares at $55 and change, resulting in gross proceeds benefiting the company to the tune of more than $280 million. Third quarter sales rose 45% to $1.78 billion, as the steady pace of growth was comforting, albeit that an EBITDA number of $5 million and change fell back a bit on a sequential basis.
In March of this year, fourth quarter sales rose 51% to $2.04 billion, with full year sales up 47% to $7.15 billion. The company posted a nearly $61 million EBITDA number for the final quarter of the year, with full year EBITDA coming in at $85 million. While this was a major increase in terms of sales and EBITDA numbers, the company still reported a net loss of $92 million, as the discrepancy from the $85 million EBITDA number was largely related to stock-based compensation expenses, a very realistic and continued expense to shareholders.
With shares down to $80 at the time, the […]
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