Chewy (CHWY 0.17%) shares have been in the doldrums over the past couple of years despite encouraging earnings reports from the online seller of pet supplies and services. The stock has lost more than 80% from its high back in 2021. But this has served as a great entry point for investors looking for a quality growth player at a dirt cheap price -- and Charles Schwab Investment Management has been seizing the opportunity.
The firm increased its Chewy holding by 6% in the fourth quarter of last year and again by 3% in the first quarter of this year, according to 13F filings. Charles Schwab now holds 686,228 shares of the e-commerce company.
The investment paid off just recently as Chewy shares soared 27% in one trading session after the company announced solid quarterly earnings and its first-ever share buyback program. Should you follow Charles Schwab into shares of this growth stock right now?
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Everything you need for your furry friend
First, a little background on Chewy. The company sells just about everything you may need for your furry and not-so-furry friends -- from food and toys to health insurance and prescription medicine. Chewy also offers virtual vet visits, and most recently, expanded into traditional veterinary care with the opening of its first vet clinics. The opening of these locations is a great way to bring the Chewy brand to new customers and create a whole new revenue stream.
The e-commerce company also has opened its virtual doors to customers in Canada, a move that required minimal investment, thanks to the strength of Chewy's existing technology infrastructure.
How has all of this translated into earnings? Chewy reached a major milestone back in 2022, reporting its first year of profitability. The e-commerce player has continued to report progress, and in the most recent quarter said that net sales rose about 3% to $2.88 billion, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) advanced by $52 million to reach more than $162 million. Gross margin also has widened to 29.7% from 28.4% a year ago, indicating Chewy is increasingly profitable.
These numbers are great, but what's extremely useful to investors are some of the details behind them, and these look especially bright. First, one of the strongest forces driving Chewy's revenue growth is consumers' purchases of nondiscretionary products, including consumables and healthcare. Second, Chewy's Autoship sales continue to make up an enormous part of overall sales, more than 77%. Autoship allows customers to sign up for automatic reorders and deliveries of their favorite products, so this represents recurring revenue for Chewy.
This is positive because, even in any potential economic rough patch, customers usually continue spending on non-discretionary products for their pets -- including the types of items that are often part of an Autoship order, like food. All of this suggests Chewy could remain resilient in any economic environment.
Free cash flow and no debt
Chewy also boasts strong free cash flow -- more than $52 million in the quarter -- and has more than $1.1 billion in cash and no debt. This has prompted the company to announce its first share repurchase program of as much as $500 million worth of stock.
A repurchase plan also indicates a company is optimistic about its growth prospects over the long term, so this is another positive sign for investors.
Meanwhile, Chewy shares, even considering the recent rebound, are trading for 23x forward earnings estimates, which looks like a bargain. Chewy's in solid financial shape and its biggest sources of revenue are in areas that could remain strong even during tough economic times. The company also is making smart moves to spur long-term growth.
Charles Schwab also made a smart move recently by increasing its position in this e-commerce stock when it traded around its lowest level. The good news is that today, the stock is cheap -- and that's why it's a great idea to follow the investment firm into Chewy and hold on for the long term.
