It was a winning first quarter for Chewy (CHWY -2.83%). Its shares surged over 27% following the release of its Q1 earnings report as its sales topped estimates and the company announced a new buyback plan.
Is the recent investor enthusiasm warranted for this online retailer of pet products? Let's take a closer look at the latest earnings report and see whether or not it is too late to buy the stock.
Higher sales and improved margins
For its fiscal Q1, which ended in April, Chewy saw its sales rise 3% to $2.88 billion. Autoship sales rose over 6% to $2.2 billion, while net sales per active customer (NSPAC) climbed nearly 10% to $562. These metrics are important, as autoship sales are recurring in nature, while the NSPAC figure shows that customers are spending more. Investors typically value recurring-revenue businesses with higher multiples given that they are more predictable.
Gross margin improved 130 basis points to 29.7%. The company credited the improvement to growth in its higher-margin sponsored ads business, a shift toward higher-margin healthcare products, lower fuel costs, and a more rational promotional environment.
The gross-margin improvement led to strong increases in profitability metrics, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soaring 47% to $162.9 million. Adjusted earnings per share (EPS) climbed 55% to $0.31 a share.
Looking ahead, the company forecast revenue to grow 2% to 3% in Q2, to between $2.84 billion and $2.86 billion. It is looking for full-year revenue to increase by 4% to 6%, or $11.6 billion to $11.8 billion. Chewy also raised its full-year adjusted EBITDA margin guidance to a range of 4.1% to 4.3%, up from a prior view of 3.8%.
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The company recently introduced a new paid-membership program called Chewy Plus that will offer a number of member benefits, including free shipping, cash-accrual rewards, and special member perks. The program is currently in beta testing as it will look to learn and apply its findings before a larger rollout. The company has also recently entered Canada as well as opened its first few Chewy Vet Care clinics in the U.S.
In conjunction with its earnings announcement, Chewy also announced a new $500 million stock-repurchase program. It is the first buyback program in the company's history.
What really stood out with Chewy's quarterly results was the operating leverage the company is beginning to see. The company's sponsored ad and pharmacy businesses carry higher margins, and it has other areas in which to drive margins higher over time as well as with private label. At the same time, operating expenses as a percentage of revenue are declining as the business continues to show scale.
Is too late to buy the stock?
Chewy stock currently trades at a forward price-to-earnings (P/E) ratio of just under 24, which may not seem cheap for a company that is looking to grow its revenue between 4% to 6% this year. However, given its largely recurring autoship business model for pet necessity products, such as food and medicine, this type of business deserves a premium, and it is trading below other retailers that cater to basic necessities, such as Walmart (NYSE: WMT) and Tractor Supply (NASDAQ: TSCO).
CHWY PE Ratio (Forward) data by YCharts.
At the same time, Chewy has a big opportunity to upsell its large customer base to its pharmacy services, which carry higher margins. Pet-pharmacy services is a huge market that is moving online, given the much cheaper prices online pharmacies have versus vets. Only about 20% of Chewy's customers currently use its pharmacy services, so just moving these customers over is a big potential, long-term growth driver.
Revenue growth, meanwhile, could also start to accelerate as pet ownership begins increasing, something the company said it was starting to see. Given the operating leverage it enjoys in its business, profitability growth should nicely exceed revenue growth.
Given these dynamics, it is not too late to buy Chewy stock even after the recent surge in price. The stock isn't as cheap as it was, but it still trades at a reasonable valuation for a strong business with a lot of levers to continue to nicely grow.
