I get it. Chewy's (CHWY 0.12%) third-quarter results fell short of analysts' estimates. The company also actually lost a small number of customers -- again. Unsurprisingly, its shares tanked to the tune of 7% on the news.
Take a step back and look at the bigger picture, though. This post-earnings plunge is an opportunity to step into a stake in a company that's doing well, as well as on the cusp of outright thriving.
A better quarter than headlines suggested
For the three-month stretch ended in October, pet supply e-commerce outfit Chewy turned a top line of nearly $2.9 billion into a per-share profit of $0.20. Revenue topped expectations by a small margin, but the bottom line missed the consensus estimate of $0.23 per share. The company also reported an active customer headcount of 20.16 million, down slightly from year-ago levels.
As was noted, the stock tumbled following the report. Yet, the market is unnecessarily seeing the glass as half-empty when it's arguably more than half-full. How so? Well, revenue, for starters. Not only did it roll in better than expected, Chewy's top line improved nearly 5% year over year, marking an uninterrupted multi-year streak of quarterly top-line growth. Profits also soared, even if they came up short.
Earnings of $0.20 per share is a 33% improvement on the year-earlier comparison of $0.15. It's also worth noting that the company's bottom line is now outright exploding -- albeit unevenly -- hinting that Chewy has reached a critical mass of revenue and earnings that stems from recently achieved scale.
Data source: Chewy Inc. Chart by author. Active customer data is in thousands.
Sales are only apt to improve, too. The e-commerce company's guidance for the quarter now under way suggests a top-line improvement of around 13%, accelerating its current growth thanks to strategic measures. Among these is last year's launch of its own veterinarian business and a relatively aggressive ad campaign, both of which are business-building efforts that can take time to pay off.
Chewy's relationship-building efforts are actually working well
But the customer attrition? It's a data point that comes with an important footnote. That is, while Chewy is indeed still losing customers, that's nothing new. It's been shedding customers since the wind-down of the pandemic, when consumers finally began shopping in stores again rather than shopping almost exclusively online. Last quarter's 0.5% setback in total customer count is actually the slowest pace of customer losses the company's seen in a while, in fact, suggesting the trend is at a turning point back to net growth. Indeed, on a sequential basis, Chewy's customer count is actually growing again.
Data source: Chewy Inc. Chart by author. Active customer data is in thousands.
Also notice that total sales to each of these active customers is still on the rise. And, as the chart below shows, autoship revenue as well as autoship revenue as a percentage of companywide sales both continue to grow.
Data source: Chewy Inc. Chart by author. Autoship sales data is in thousands.
This autoship business is no small matter, either. These are sales put on autopilot by customers that simply want a continual supply of food and other pet-related products without needing to constantly place new orders. The company doesn't need to spend nearly as much on marketing and promotions to drive this recurring revenue, which accounts for the vast majority of the company's business.
All of it, if course, suggests Chewy's building stronger customer relationships than last quarter's slight year-over-year setback in its customer count implies.
More upside potential than downside risk
Like all stocks, this one brings at least some unique risks to the table. It's still relatively expensive at 40 times next year's projected per-share earnings of $0.78, for instance, in light of what's unusually slow sales growth for an e-commerce company. In fact, the analyst community is in wide disagreement as to the actual fiscal numbers in the cards, making this ticker even tougher than usual to value.
As was already suggested above, however, take a step back and look at the bigger picture. This really isn't a profit story -- at least, not yet. It's not a growth story either. The crux of the bullish argument for owning Chewy stock here and now is the company's progress toward an even-deeper dominance of the United States' pet supply e-commerce industry, which Bloomberg Intelligence believes is set to nearly double in size between last year and 2030. It's doing fantastic in that regard, building on its market-leading one-third share of the U.S pet e-commerce market.
In this light, the recent pause of Chewy stock's recovery effort from its post-pandemic pullback is a fantastic entry point. The company's progress is going to become increasingly tough to ignore, making now -- while most investors are distracted -- the right time to wade in.
