Shares of Chewy (NYSE: CHWY) have rebounded this year after falling sharply from their previous peak in 2021. Although Chewy's sales are still being weighed down by macroeconomic headwinds, pet spending could be turning the corner.
The pet supply purveyor reported a sales increase of 4.8% year over year in the fiscal third quarter (ended Oct. 27), an improvement over the previous quarter's 2.6% increase. Sales growth is still accelerating, and management is forecast a full-year revenue increase of about 6% year over year, which implies strong growth in its fiscal fourth quarter.
The stock is trading at a reasonable price-to-earnings ratio of 25 based on this year's average earnings estimate. Here's how Chewy is aiming to drive long-term growth that could make the stock an excellent buy heading into 2025.
Growing repeat sales
One of the attractive aspects of Chewy's business is that management is pursuing initiatives to build growing streams of repeat revenue from customers. It is accomplishing this through its Autoship program, membership services, and healthcare offerings. The company's bottom line could benefit as it builds these recurring revenue streams.
It starts with Autoship, where customers can have their preferred pet food automatically shipped on a regular schedule. Autoship made up 80% of last quarter's sales and grew 9% year over year.
The company is also seeing positive early results from a paid membership program it recently started testing. Customers who subscribe to Chewy+ are placing more orders and have higher cross-category penetration than nonmembers. It's also seeing Chewy+ members use Autoship more, which further benefits the company's repeat sales strategy.
Another opportunity for the company is health services. It has been investing in this market for years and is already the No. 1 pet pharmacy business in the U.S. It now operates its own veterinary clinics under the brand name Chewy Vet Care, extending the company's addressable market.
Veterinary care is a $25 billion opportunity, and the investments management continues to make in healthcare show that it is seeing great traction in using non-retail services to drive sales across the business.
Improving margins and share buybacks
Chewy is building an ecosystem of services that provides almost everything a pet owner needs. If the company can scale up and show widening margins during the next few years, the stock could take off.
Its gross margin has improved each year since fiscal 2021 and is on pace to hit another high-water mark of 29.2% for fiscal 2024, ending in January -- an increase over 28.4% last year.
It's also a good sign when you see management stepping up company share repurchases. Through the first three quarters of the year, the company bought back $875 million worth of stock, with $343 million repurchased in the fiscal third quarter. Management clearly believes the shares offer solid value right now.
The pet care industry is very competitive, but Chewy has a promising strategy of offering services that create a positive flywheel of spending from repeat customers. Wall Street analysts are expecting the company to post rising earnings growth during the next several years as margins widen. Assuming the near-term momentum carries over to 2025, the stock could hit new highs next year and go on to deliver outstanding returns during the next decade.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
