Shares of Chewy (CHWY 0.12%) were trading lower last week following the online pet products retailer's third-quarter results, despite the company increasing its full-year guidance. The stock has nonetheless had a solid 2024, trading up more than 33% as of this writing.
Chewy's stock gained investor attention and saw a big jump in its share price earlier this year after Keith Gill, a k a Roaring Kitty on the WallStreetBets message boards of Reddit, revealed a large investment in the company. Gill has since taken his profits.
Let's dig into Chewy's results to see if investors should buy the recent dip.
Revenue growth acceleration
For its fiscal third quarter ended in October, Chewy's revenue started to accelerate, up nearly 5% year over year to $2.88 billion. That was a nice improvement from the 3% sales growth in each of Q1 and Q2. Autoship sales jumped nearly 9% to $2.4 billion and were 80% of its total revenue.
Net sales per active customer (NSPAC), meanwhile, rose 4% year over year to $567. It added 200,000 new active customers in the quarter, although year over year it had 100,000 less active customers.
Gross margin continues to be a focus for the company, and it saw a year-over-year improvement of 80 basis points to 29.3%. Chewy also continues to leverage its selling, general, and administrative (SG&A) expenses, which improved by 90 basis points.
The gross margin and SG&A improvements helped drive increased profitability. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 66% year over year to $138.2 million. Adjusted earnings per share (EPS), meanwhile, climbed 33% to $0.20 from $0.15.
Chewy produced $152 million in free cash flow in the quarter compared to only $48 million a year ago and $91 million in Q2. It ended the quarter with $507 million in cash and marketable securities and no debt. It repurchased $300 million worth of shares in the quarter from its largest shareholder, BC Partners.
Image source: Getty Images.
Chewy is expecting a big acceleration of revenue growth in Q4. It projected sales to rise by about 13% to between $3.18 billion and $3.12 billion. Meanwhile, it raised its full-year guidance and now expects sales between $2.84 billion and $2.86 billion, representing growth of 6%. This is up from previous guidance calling for revenue of between $2.84 billion and $2.86 billion, representing 3% to 4% growth.
Chewy also raised its full-year adjusted EBITDA margin guidance to a range of 4.6% to 4.8%, up from a prior outlook of 4.5% to 4.7% and an original forecast of 3.8%.
Is it time to buy the dip?
Chewy stock currently trades at a forward price-to-earnings (P/E) ratio of around 25 based on next year's analyst estimates with a price/earnings-to-growth ratio (PEG) of just over 1. PEG ratios below 1 are typically considered undervalued.
Its P/E is just below that of other resilient retailers Walmart (WMT -1.22%) and Tractor Supply (TSCO -1.68%), while its earnings growth is much higher, leading to a much more attractive PEG ratio.
CHWY PE Ratio (Forward 1y) data by YCharts
Chewy has been doing a great job of controlling costs as well as raising margins through a number of initiatives such as pharmacy sales, sponsored ads, automation, and increasing private brand penetration. This is leading to strong profitability growth.
Meanwhile, revenue growth has started to accelerate as it has begun to increase its number of customers quarter over quarter while also seeing continued strong sales-per-active-customer growth. The company also said it is starting to see pet adoption rates increase. There was a surge in pet adoption during the pandemic, but growth then slowed to below-normal levels following this heightened period. This return to a more normal pet adoption rate should be a nice growth driver for the company.
Chewy is also seeing some solid early success from its new paid membership program, Chewy Plus, which it launched this summer to select customers. The membership offers free shipping, cash rewards, and other perks. It said so far it is seeing these members place more orders, buy across more categories of products, and use the mobile app more. Memberships like this have been successful for companies like Amazon and Walmart, so this is another potential growth driver.
As such, I think Chewy still looks like a solid long-term option after this pullback.
