Chewy Stock: Don't Get Chewed Up By This Pricey Pet-Supply Pick

(MENAFN- ValueWalk) Some investors may be wondering whether Chewy (NYSE:CHWY) stock will end up like Pets stock did in the 2000s . While it's unlikely Chewy stock will follow a similar path, if you're concerned that today's market environment parallels the elevator-up feeling of the dotcom bubble, then perhaps it's time to take profits.

Pets might have actually been too far ahead of its time, as many people weren't ready to buy their pet supplies online more than 20 years ago. However, people are accustomed to buying practically anything and everything online today.

As such, Chewy's subscription-based business model capitalizes on the tendency of online shoppers to seek convenience. Yet, during a time of high consumer prices, shoppers may be forced to choose affordability over convenience.

That's potentially a problem for Chewy, and forward-thinking investors should conduct their due diligence instead of following the crowd and chasing Chewy stock.

High pet food prices are the new normal

Chewy stock zoomed nearly 14% higher on Tuesday despite the lack of company-specific news, but that's nothing compared to what happened in 2020 and early 2021. With COVID-19 lockdowns prompting pet owners to purchase supplies online, Chewy raked in the revenue and its share price skyrocketed.

However, that was then, and this is now. While it's true that the Chewy share price is on the rise, don't expect a repeat of the 2020-to-2021 rally. The COVID-19 catalyst is in the rear-view mirror. Additionally, the risk-on market sentiment of 2021 has dissipated due to persistent price inflation and the steady stream of interest-rate hikes in 2022.

Speaking of inflation, many pet owners have probably noticed the shocking price tags on pet supplies lately. Chewy CEO Sumit Singh is clearly aware of this problem, having acknowledged to Yahoo! Finance that there's“an unprecedented amount of inflation that has passed through the system.”

To quantify the“unprecedented amount” of pet-supply inflation, Singh observed that pet food price inflation is normally 2% to 4%, but it has risen by“double-digit percentages” over the last three years.

Unfortunately, if pet owners are hoping for significant, near-term relief in their pet-supply bills, they shouldn't hold their breath.

On that topic, Singh expects to see“incremental discounting” in the“latter half of this year.” However, the Chewy CEO is“not really expecting... something structural to change in pricing moving forward.”

Nevertheless, Singh remains highly optimistic. He fully expects“higher profitability” despite the impact of price inflation and promised to“pass that value on back to the consumer.”

To that remark, investors and consumers alike should take an“I'll believe it when I see it” stance.

A 'solid start' and a high valuation

“Fiscal year 2024 is off to a solid start,” Singh declared as Chewy released its first-quarter results.

Indeed, there's no denying that the company's earnings growth was“solid.” However, Chewy's sales growth wasn't mind-blowing by any means.

Drilling down to Q1 of FY2024, Chewy's net sales increased 3.1% year-over-year to $2.88 billion. That's a decent but not spectacular result, and it slightly surpassed the analysts' consensus estimate of $2.85 billion .

More impressive was Chewy's adjusted earnings of 31 cents per share, versus 20 cents in the year-earlier quarter. Moreover, this result easily beat Wall Street's call for earnings of 20 cents per share.

It's certainly a positive sign that Chewy's board of directors approved share repurchases of up to $500 million. This signals management's confidence in the company's future prospects, although confidence certainly doesn't ensure results.

Circling back to the topic of convenience, Chewy's Q1-FY2024 autoship customer sales grew 6.4% year over year to $2.2 billion. Clearly, some shoppers continue to enjoy Chewy's subscription options. Yet, it's unclear whether this will persist despite uncomfortably high pet-food prices.

That question will only be definitely answered in the current and upcoming quarters. However, it appears that the market has already priced in its assumption of rapid, continued growth for Chewy.

Here's where the memories of Pets start to resurface. Believe it or not, Chewy's GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio is 135.94 . To provide some context, the sector median P/E ratio is 17.87.

Singh claims that Chewy's“value proposition continues to resonate with our customers.” Maybe it does, but the company's value proposition shouldn't resonate with cautious investors.

Again, Chewy stock probably won't collapse like Pets stock did 24 years ago. However, it is possible that Chewy could become the poster child of mid-2020s valuation excess if its P/E ratio and share price eventually collapse.

Therefore, I encourage investors to chew on the aforementioned data pertaining to Chewy. Meanwhile, they should seriously consider taking profits and seeking out better bargains in the consumer-goods sector.



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