Is Chewy Stock a Buy as Revenue and Margins Continue to Grow?

Chewy (NYSE: CHWY) shares failed to gain traction after the company reported another strong fiscal first quarter and lowered its full-year revenue guidance slightly due to a more cautious consumer. The stock is now down about 40% on the year.

Let's take a closer look at the pet products e-commerce operator's results and prospects to see if this is a buying opportunity.

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Solid growth in the face of a weakening consumer

Despite earlier warnings that it was not completely immune to a weak consumer, Chewy delivered strong results. Revenue jumped 7.7% to $3.36 billion, a smidge ahead of analyst expectations. Meanwhile, adjusted earnings per share climbed 23% to $0.43, meeting the consensus estimate.

It saw its active customers rise 3.6% year over year to 21.5 million, while net sales per active customer grew 2.4% to $597. Sales derived from autoship customers, meanwhile, climbed 10.5% to $2.83 billion and accounted for 84.4% of its total revenue.

Importantly, margins continued to increase. Its gross margin rose by 50 basis points to 30.1%, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins jumped from 6.2% to 7.5%. This helped lead to a 31.2% increase in adjusted EBITDA to $253.1 million.

Looking ahead, the company guided for fiscal Q2 revenue of between $3.3 billion and $3.33 billion, representing growth of 6.3% to 7.5%, with adjusted EBITDA margins of 6.3% and 6.4%, up 50 basis points year over year.

For the full year, the company lowered expectations, taking it to a range of $13.40 billion to $13.55 billion, good for 6.3% to 7.5% growth, versus a prior outlook for revenue between $13.6 billion and $13.75 billion, representing growth of between 8% and 9%. It continues to expect adjusted EBITDA margins to expand 100 basis points to between 6.6% to 6.8%.

A cheap stock with strong operating leverage

While Chewy slightly lowered its full-year guidance, the company's overall business model remains very resilient, as the majority of sales come from customers enrolled in its autoship program. The company's cautious tone is not unique among retailers, with consumers being pinched by high inflation and gasoline prices.

Meanwhile, the company continues to see solid margin expansion. It's seeing solid operational efficiency as it adopts artificial intelligence, while boosting gross margins from its sponsor ad business. Given Chewy's modest operating margins, continued margin expansion should be a big profit driver moving forward.

With the stock trading at a forward P/E of just 13 times the current-year analyst consensus, the stock is a bargain given its growth, expanding operating margins, and resilient business model. I'd be a buyer at these levels.

Geoffrey Seiler has positions in Chewy. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.