This Profitable Pet Stock Has Extremely Bright Prospects

Othe last quarters, Softit is (NYSE:CHWY) the company underperformed, but is a rebound in sight? In this clip from “The Virtual Opportunities Show” on Motley Fool live, recorded on April 12Fool contributors Demitri Kalogeropoulos, Travis Hoium, Jose Najarro and Rachel Warren explain how the online retailer of pet products is poised for significant growth and success.

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Demitri Kalogeropoulos: The Chewy Company, ticker symbol CHWY. Their earnings reported at the end of March, as you can see in this chart here, Wall Street wasn’t exactly happy with that earnings report or much of the last two. The stock is down, what is this 45%? Almost 50% last year. The winnings weren’t that bad. Sales were 19%, sales growth was 19%, which is just a little lower than what Wall Street had expected. The bottom line is that there has been a slight increase in churn, cancellations, which is of great concern to investors.

Chief Financial Officer Mario Marte explained that it was essentially a problem of low customer retention due to unusual aspects regarding the group of customers from a year ago who signed up for their service. subscription, pet food and pet products. Most of their revenue comes from the subscription service where you just get that recurring revenue, food purchases and things like that.

But, because at the start of the pandemic, they were getting a surge in subscribers for recurring services maybe not that much higher than the usual part of that group being canceled next year, which leads to some volatility in their growth figures. There have also been higher costs, as we see across the industry, which have hurt profitability.

Gross profit margin fell to around 25% of sales from 27%. Adjusted profit turned into a bit of a loss. They lost $28 million compared to a gain of $50 million a year ago. I understand why Wall Street was unhappy with a lot of these numbers. I usually like to see the losses go up and then slow the growth down like that. But I think the long-term growth story is good here.

I mentioned this subscriber number, they have about 71% of their customers who sign up for this subscription service. It’s a very good business model. We have seen this with other companies like Costco (NASDAQ: COST), for example, where most of their revenue comes from this recurring process. It’s a record for them. Their customers are engaged. It doesn’t look like it’s losing much market share to other big companies like Walmart or something like that.

Management is basically saying it’s just an anomaly, it’s a one-time thing, we think it’s going to subside over the next two quarters. I tend to want to take the management at their word, as it’s hard to say they aren’t sure either. But that’s what it seems to me. I think the stock could really rebound on the gross profit margin they have, they expect that to be 28% of sales. They raised the prices. This is going to happen over the next two quarters.

The industry itself, as we mentioned, is a very high growth industry. They serve pet owners and the North American market is growing. This is huge and as we mentioned before, people are spending a lot more money on their pets. We mentioned TikTok earlier. There are many and many TikTok stars, dogs, little dogs and cats that have millions of followers. [laughs]

Travis Houm: Hey, I’m having a dog. Does the dog come with a TikTok account or do I have to do it myself?

Jose Najarro: Now you turn it over.

Hoium: Exactly. They pay their way man.

Rachel Warren: That would be great.

Hoium: There will be enough to pay my Trupanion (NASDAQ: TRUP).

Kalogeropoulos: Now we are talking. [laughs] Maybe you might not want to buy the stock right now, but it’s a stock I’d definitely be watching if you’re interested, as I’m curious how the next few quarters are going to pan out and I think this company could bounce back. Like I said, I like the idea of ​​long-term growth. Do you have anything to add here Rachel?

Warren: It’s also a stock that I’ve followed and I think it’s a stock that the market has been tough on. I think stocks in this space, there has been a lot of volatility. I think two of the main ones that investors would watch would be Trupanion and Chewy.

As you mentioned with Chewy, it’s really managed to retain a significant market share even though there’s competition in that space. I think one of the reasons behind that is that it’s so much more than just a business that sells pet food, dog food, cat food. It has this really growing side of its business and its pharmacy segment, which continues to be a growing part of its overall growth. It also has this telehealth side, this pharmacy segment as well where pet owners can log in and connect with the vet within minutes.

There are a lot of things I think it offers its users beyond what you traditionally think of as an online pet store to go and find food or toys for your pet. I think there is a lot of potential with this company. I want to see how management performs over the next few quarters in particular. But I think there’s a lot of growth here. I just think it’s one of those things where as an investor I think if it was me and I was already invested in this business it might take a little bit of patience, but I think it’s a very good company.

Demitri Kalogeropoulos holds positions at Costco Wholesale. Jose Najarro has no position in the stocks mentioned. Rachel Warren has no position in the stocks mentioned. Travis Hoium has no position in the stocks mentioned. The Motley Fool fills positions and recommends Chewy, Inc., Costco Wholesale and Trupanion. 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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