The market may be finally throwing Chewy (CHWY -2.83%) stock a bone. The stock rose more than 25% after the company announced its earnings for the first quarter of fiscal 2025 (ended April 30).
Even with that surge in the stock price, it is still more than 80% below the all-time high set in early 2021. Chewy will likely not return to that record anytime soon, but could the increase signify the beginning of a recovery in the internet and direct marketing retailer? Let's take a closer look.
Chewy's improving business climate
The future looks bright, or at least brighter, for Chewy. After numerous quarters of lower discretionary spending on pets, the company forecasts an improvement in the second half of the year.
Admittedly, customer counts continued to fall, with the active customer base falling below 20 million, a 2% yearly decline. Still, the number of autoship customers, who purchase automatically on a recurring basis in exchange for a discount, rose to 78% versus 75% the year before.
The company has also diversified from low-margin retailing to opening vet clinics and selling pet pharmaceuticals, a higher-margin product. Although the quarterly report made little mention of these business lines, they could still boost revenue in the future.
Another move that can help Chewy is its plan to repurchase stock. The company authorized up to $500 million in share repurchases. At current prices, that would remove more than 2.3 million of the 435 million shares outstanding from the market, approximately half of the shares issued over the last year.
Indeed, the company's share management may reassure investors. About 398 million shares were outstanding when the stock launched its initial public offering (IPO) in 2019. This indicates a minimal reliance on diluting shareholders to maintain its operations while it lost money.
Additionally, 19% of the publicly traded float is short as of May 15. A reduced number of shares makes the stock less likely to fall, meaning investors may close more shorts, which should raise the stock price in the near term.
How Chewy fared financially
Still, prudent share management does not necessarily compensate for lackluster financials. Its fiscal Q1 net sales of $2.9 billion grew by only 3% compared to year-ago levels.
Fortunately, slower growth in the cost of goods sold significantly boosted its net income. That came in at $67 million, well above the $23 million in the same quarter last year.
Still, even with the positive reaction to the report, the stock has only just begun to recover, having still fallen 30% over the last 12 months.
Furthermore, analysts forecast net sales growth of 6%, a level unlikely to inspire growth-oriented investors. Also, since it is newly profitable, the 237 P/E ratio is likely not a reliable indicator of its valuation.
However, its forward P/E ratio stands at about 24, a level that just bounced off of all-time lows for the forward multiple. That has made the stock inexpensive by historical standards, a factor that should boost the stock's outlook.
Should I buy Chewy?
The improved outlook and share buyback are not necessarily enough to bring growth investors back to Chewy stock.
Indeed, the share repurchases and higher profits are good reasons to close any short positions. Also, the prospects for rising income should bring some level of sustainable growth, a factor that could attract value investors at the right stock price.
However, the low-single-digit increase in sales is unlikely to inspire a rapid recovery. In the end, retailing is a competitive, low-margin business. Without data showing that pharmaceuticals and clinics are bringing it more high-margin revenue, it is on track for low or moderate growth at best.
