Is it a good time to buy soft stocks?


As an e-commerce specialist, Soft (NYSE:CHWY) was overtaken by the broader market downturn that sent many tech stocks reeling in 2022. Stocks were actually down more than 30% through early November.

Wall Street is worried about slower growth compared to earlier phases of the pandemic, when adoption rates boosted sales. The pet supplies specialist also faces profitability challenges from rising costs.

But now might be a good time to consider buying Chewy’s stock. Let’s take a look at some reasons why it looks attractive as a long-term investment.

Buyers are engaged

Yes, Chewy’s latest 13% sales increase represents a significant slowdown from last year’s growth. Investors have been celebrating back-to-back quarters of over 40% year-over-year growth in 2020, after all. The current rate of expansion is much lower, in part because pet owners are reverting to some pre-pandemic buying patterns after temporarily shifting more spending online.

But Chewy continues to grow faster than the broader market, and this market share growth is just one indication of its enduring strength in a tough sales environment.

Another sign of this strength is its auto-delivery service, which recently hit a record 73% of sales. Unlike most e-commerce retailers, Chewy’s customer base overwhelmingly chooses to engage in regular monthly purchases. This growing commitment means continued market share gains to come.

Chewy is profitable

Chewy has lost some of the customers it gained during the lockdown phases of the pandemic. And even worse, many of those shoppers had disproportionately purchased higher-margin products rather than consumable pet supplies like food. This change has added pressure to a company that has already been hit by soaring costs.

Yet Chewy has no trouble passing on these additional costs. “Price growth has outpaced rising cost inflation,” Chief Financial Officer Mario Marte said on a recent conference call. This success contributed to the increase in gross profit margin, although many industry peers reported declines. Chewy is also in no danger of slipping into the red. On the contrary, the adjusted profit margin reached 3% of sales in the last six months, compared to 2.3% of sales a year earlier.

The industry resists the recession

No industry is immune to the kind of demand pressure that a recession would bring. But Chewy’s business is well-positioned to weather a downturn, should it develop in the coming quarters. Consumers tend to avoid making drastic changes to their pets’ food, treats and toys, making this niche unusually stable. And these so-called “non-discretionary” categories currently make up more than 80% of Chewy’s sales base.

In fact, the past few quarters provide a good indication of how the business might perform during a recession. Chewy has already seen a sharp decline in its discretionary product lines, but it has continued to grow sales, gain market share and increase overall profitability.

A more severe downturn would likely lead to lower revenue while adding further pressure to its near-term earnings. But Chewy’s business looks set to succeed regardless of the sales climate that develops in 2023.

That’s why investors should consider buying this stock, especially given its more than 30% decline over most of the past year. This collapse does not reflect the company’s steady growth in market share or Chewy’s strong financials.

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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool holds positions and recommends Chewy, Inc. 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.

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