This E-Commerce Stock Might Be Recession-Proof – Here’s Why
JThe current bear market has hit many stocks hard, but it has been particularly brutal for the e-commerce sector. And shares of Soft (NYSE:CHWY)an online retailer of pet food and supplies, also took their fair share of hits.
Many investors are staying away from Chewy due to its declining share price, some are dismissing the company as a pandemic game, and some are worried about how the company will fare if the economy continues to slow. However, a closer look at Chewy’s business suggests investors’ concerns may be misguided.
Let’s see why pessimistic investors could be missing out on a great long-term investment opportunity, and also potentially a recession-proof stock that could offer solid downside protection as the economic climate may deteriorate.
Chewy is not a pandemic-only company
Chewy has become a go-to place for over 20 million pet owners to shop for pet food, treats, toys or any other item they might think of buying for their pets. . Chewy’s extensive product catalog, easy-to-use website, and the convenience and speed of e-commerce have really resonated with pet owners.
The COVID-19 pandemic has accelerated consumers’ transition from purchasing pet supplies in physical stores to Chewy’s online store. As COVID-19 shut down the world, Chewy grew its customer base by 43%, from 13.5 million in 2019 to 19.2 million in 2020, a pretty stunning jump. This significant gain was followed by another 8% increase in 2021, even as the effects of the pandemic began to wane.
To the surprise of many, in 2022 Chewy didn’t lose the subscribers he gained during the pandemic. In fact, subscriber count in the first quarter of fiscal 2022 (ending April 30, 2022) was up another 4% from a year ago.
Chewy turned out not to be a fad. With its wide selection of over 100,000 pet products and medications, virtual healthcare, and pet insurance services, Chewy has become a one-stop-shop for pet owners, and they stick to it. So, despite being called a pandemic game by some, smart investors watching the numbers realize that nothing could be further from the truth.
Key customer metrics point to a bright future
Chewy’s automatic delivery model – where customers can set up recurring purchases for items and get discounted prices – and its “set it and forget it” convenience for regularly needed items is really appealing to customers. Autoship revenue has grown steadily, and in the recently released first quarter of fiscal 2022 reached more than 72% of total revenue, a year-over-year increase of three percentage points. the other. This bodes very well for Chewy’s business, as autoship revenue, by its nature, is relatively stable and reliable.
Another key point to note is that despite all the macro headwinds and a potential downturn in the economy, customers are spending more money with Chewy. Average sales per active customer in the recently reported quarter hit an all-time high of $446, a 15% jump from a year ago.
Finally, on average, the longer customers stay with Chewy, the more they spend with the company each passing year. Customers who joined Chewy in the last year spent less than $200 on average. This expense increases to $400 for customers with more than two years of Chewy subscription, and to around $700 in their fifth year. The oldest cohort of customers — those who have been members since the company was founded in 2011 — spends around $1,000 a year. This incremental growth in customer spending highlights Chewy’s ability to deeply understand its customers’ needs, present the most relevant offerings at acceptable prices, and create an overall satisfying experience.
Overall, growth in the number of customers and spending per customer drove revenue growth from $4.8 billion in fiscal 2019 to $8.9 billion in fiscal 2021. The company has also increased its year-over-year revenue by 14% to $2.4. billion.
So while some investors may be discouraged by Chewy’s falling share price, key customer indicators point to a bullish future for the company.
Can Chewy survive a potential recession?
About 70% of households in the United States, or more than 90 million families, own a pet. And people love their pets – in fact, most people are obsessed with them. So it’s no big surprise that spending on pets in the United States has increased every year since 1994 (data was not available for previous years), and that includes the dot-com crash. and the subsequent recession in 2001, as well as the global financial crisis and subsequent recession in 2008-2009. So even in the toughest of times, when consumers are looking to cut back on their spending in any way they can, the pet care industry has shown tremendous resilience and weathered the recession.
And Chewy, with its loyal customer base increasingly spending with the company, appears to be in a strong position even in a declining economic environment. The company also has about $605 million in cash, giving it a solid cushion. In fact, Chewy may be able to further expand its leadership in pet e-commerce as some smaller brick-and-mortar competitors grapple with the economic downturn and rising costs.
For investors looking to protect their investment downside in a possible recession and also looking to excellent long-term returns, Chewy may be a stock worth considering. The current drop of more than 55% in its shares from their peak about a year ago makes it an even more intriguing opportunity.
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Kaustubh Deshmukh (KD) holds positions at Chewy, Inc. 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.