Should Investors Buy Chewy Stock at the Discounted Valuation?

Core Insights - Chewy Inc. (CHWY) is a leading online pet retailer with a trailing 12-month price-to-sales (P/S) multiple of 1.33X, significantly lower than the industry average of 2.69X, raising questions about its investment potential [1] - The company has seen an 8.9% increase in stock price over the past month, outperforming the industry decline of 2.4% [2] - Chewy's Q2 net sales reached $3.1 billion, an 8.6% year-over-year growth, driven by strong performance in its Autoship program [7][8] Valuation and Performance - CHWY's trailing 12-month P/S ratio is favorable compared to competitors like Central Garden & Pet Company (0.61), Petco Health and Wellness Company (0.18), and BARK, Inc. (0.28) [1] - The company has outperformed its competitors, with Central Garden and BARK shares declining by 15.9% and 9.3%, respectively, while Petco Health gained 4.7% [3] Sales and Growth Drivers - Autoship sales hit a record $2.58 billion, accounting for 83% of total quarterly revenues, with a year-over-year growth of 14.9% [9] - The active customer base grew to 20.9 million, a 4.5% increase year-over-year, with net sales per active customer rising by 4.6% [10] - Chewy's gross margin improved by 90 basis points to 30.4%, and adjusted EBITDA grew by 34.8%, indicating effective cost management [10] Strategic Initiatives - The Chewy Vet Care network plans to open 8-10 practices in fiscal 2025, enhancing service offerings [11] - The Chewy+ membership program is contributing approximately 3% of monthly sales, indicating higher customer engagement [11] - The launch of the new private brand of fresh dog food, Get Real, has received positive customer feedback [12] Future Outlook - For fiscal 2025, Chewy raised its net sales outlook to $12.5-$12.6 billion, reflecting a 7-8% adjusted year-over-year growth [13] - The company anticipates a 5.4-5.7% adjusted EBITDA margin for the full year, with expected margin improvements driven by gross margin gains [14] - Chewy maintains a strong balance sheet and a debt-free position, positioning itself for sustainable long-term value [15] Earnings Estimates - The Zacks Consensus Estimate for EPS has seen upward revisions, with current estimates for the fiscal year increasing to $1.27 and $1.53 for the next fiscal year [17] Challenges and Competitive Landscape - Management expects margin expansion to moderate in the latter half of fiscal 2025 due to reinvestments in strategic programs [19] - Rising operating costs and fulfillment inefficiencies have constrained Chewy's leverage potential, with SG&A expenses rising to 19.1% of net sales [20] - Competitive intensity remains high, prompting Chewy to sustain advertising and marketing spend at $200.6 million, or 6.5% of sales [22]