Down 50%, Is Chewy Stock a Buy on the Latest Dip?

It's been a tough past year for Chewy (NYSE: CHWY). Its shares have been cut in half over the past year, and the stock plunged 11% after earnings came out on Sept. 9. While the company's results were in line with its earlier guidance, it was considered a low-quality beat due to tariff refunds, gift card breakage, vendor-funded merchandise activity, and a shift in rebates into the second quarter.

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

Solid revenue growth, but cautious guidance

While Chewy saw overall solid revenue growth, the company said it continues to see signs of a stressed consumer, as evidenced by fewer treat and other discretionary sales. It expects the pet industry to remain under pressure for the rest of the year, and plans to focus on more controllable factors such as retention and customer acquisition. Along these lines, it plans to launch a redesigned Chewy+ program that includes more health benefits and offers a better customer value proposition.

The company also continues to work to reduce costs and increase operation efficiency through the use of automation and AI. Its AI-powered assistant Kai is already answering approximately 30% of customer inquiries since its launch. Chewy also continues to expand its healthcare services, with Chewy Vet Care, Modern Animal, and SmartPak all performing well.

For the quarter, overall revenue climbed over 7% year over year to $3.33 billion. That was at the high end of the company's earlier forecast for sales of between $3.3 billion and $3.33 billion.

Despite industry headwinds, Chewy still has a very steady business, with the bulk of its sales coming from consumables, such as dog food and pet medication. Meanwhile, nearly 85% of its sales come from Autoship customers who have their orders scheduled to be delivered on a regular basis. Autoship customer sales jumped more than 9% year over year to $2.82 billion. Net sales per active customer (NSPAC) continued to increase, up nearly 2% year over year to $602, while active customers rose 4% year over year to 21.7 million.

Chewy has positioned itself as an operating leverage story, and that narrative was a bit messy this quarter, with the earlier referenced items attributing $15 million in benefits to the quarter. Gross margin remained steady at 30.4% year over year, although Chewy said that, excluding non-recurring items in both periods, it expanded, helped by growth in its sponsored ad business and disciplined promotional activity.

Selling, general, and administration (SG&A) costs climbed 5%, although the company saw 70 basis points of SG&A deleveraging. It credited productivity gains, better fulfillment center utilization, lower variable costs, and keeping headcount in check for the improvement. It called out lower variable costs as the biggest contributor, while highlighting gains from automation and AI tools. All this helped lead to a 90-basis-point increase in EBITDA margins to 6.8%, and Chewy said it saw nice expansion even when excluding the benefits it saw in the quarter.

Adjusted earnings per share (EPS), meanwhile, rose 9% year over year from $0.33 to $0.36, falling in line with guidance of $0.36. Adjusted EBITDA jumped nearly 7% year over year to $226.7 million.

Looking ahead, Chewy forecasts fiscal third-quarter revenue to grow by 6.6% to 7.7% (5.3% to 6.2% organically) to $3.32 billion to $3.36 billion. It expects gross margins to decline sequentially, which is typical seasonality.

For the full year, the company upped its revenue guidance from a range of between $13.4 billion and $13.55 billion to a new range of $13.46 billion to $13.57 billion. It bumped up its adjusted EBITDA margin guidance slightly to 6.7% to 6.8% from an earlier range of 6.6% to 6.8%.

Image source: The Motley Fool.

Time to buy the dip

Despite a relatively messy quarter with some moving parts and cautious commentary, the company's overall quarter and guidance were solid. Investors have been acting like this is a business falling off a cliff, when in fact it remains highly recession-resilient with continued operating leverage opportunities.

From a valuation perspective, Chewy stock currently trades at a forward price-to-earnings (P/E) ratio of around 13.5 times this year's consensus and 11 times based on next-year analyst estimates. That's a bargain-basement price for this retailer with its large Autoship business. While pet owners may cut back on dog treats and toys, they aren't going to stop feeding and giving medicine to their pets. As such, I'd be a buyer of the stock here.

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