Chewy's Competitive Advantages Promise Strong Growth Potential

seekingalpha2021-09-08

Summary The pet food and pet care industries will exceed $130 billion TAM by 2025. Chewy offers high-quality consumer service which yields a quite high consumer satisfaction levels. The stock is ...

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Hartanto
2021-09-08
Hartanto
Tell me your opinion about this news...
- Hartanto:
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Brencakes
2021-09-08
Brencakes
Nice

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an industry which has huge growth potential as it has only achieved a 30% penetration. Chewy is one of the major retailers in the industry which offers a high-quality consumer experience and achieves significant consumer satisfaction levels. Our model indicates that the stock is fairly valued and can bring double-digit returns in the upcoming decade.\nWhen we analyze the e-commerce industry, we clearly see that there are several sectors where e-commerce penetration cannot reach 100%. Particularly when we speak about clothing retailers, it is clear that the majority of consumers prefer wearing different clothes and checking how they fit them before buying. When we speak about the real estate sector, we think that online penetration cannot go too high as people need to assess the condition of apartments by visiting them personally. However, the pet food industry is one where we can witness penetration levels approaching 100% in upcoming years; consumers can order their preferred brand products and don't need to buy goods directly from retail stores.\nCurrently,67%of US families (totaling 85 million people) own a pet; an increase from 56% in 1988. The online pet market is growing quite rapidly in the USA; the penetration rate reached30% in 2021while it was only at the 8% level in 2015. This number is expected to grow to 53% by 2025 and the total pet industry is estimated to reach $94.6 billion value. E-commerce technology is improving pet owners lives with 23% of Millennials and Gen Z pet-owners reporting that technology helps them to save time on pet care considerations. 21% of the survey respondents also said that the technology allows them to spend more quality time with their pets. So, as consumer preferences incline towards technology, e-commerce players will benefit significantly.\nAsurveyconducted by Packaged Facts revealed that for 58% of pet-owners veterinarians are the most influential information providers for their pet care needs. So veterinarians are quite important for Chewy's business as they can bring lots of consumers to the platform. Thus, Chewy's new initiative for veterinary services can help the business to attract lots of new clients and keep current clients loyal for long periods of time. The \"Contact with a Vet\" service allows consumers to have a live chat with a veterinarian, and get advice about pet related issues. In urgent cases, they will refer to a local vet to provide emergency treatment. This service entices first-time consumers who are likely to buy more products from the Chewy platform and to enroll in the Chewy Autoship program. Chewy has recently launched a marketplace for veterinarians directly on chewy.com which will allow them to increase clinic revenues. The free service will allow them to list their products on the Chewy platform, set prices and deliver products to consumers using Chewy's nationwide network.\nThe service also allows Chewy to penetrate the pet pharmacy market, which represents a $7 billion market opportunity, where only $1.3 billion is generated by e-commerce players. Chewy has about 40-45% share in the e-commerce pet pharmacy industry, which indicates Chewy's strong position and huge growth room for the business. The company is going to open a third Chewy pharmacy later this year in Pittston, Pennsylvania. This will help the company to increase the speed of delivery in the Northeast and Mid-Atlantic areas, further increasing the speed of business expansion.\nExpansion of Chewy's products and services base makes the company a unique industry player which proposes a full ecosystem of pet care products. The expansion into the pet health segment opens another $35 billion total addressable market opportunity for the company, which is about 40% TAM expansion.\nIn the pet e-commerce industry, the largest players are Amazon (AMZN), Chewy and Walmart (WMT), as59% of consumersbuy goods from Amazon, 41% buy from Chewy and 33% from Walmart. So Chewy's main competitors are general retailers which propose a wide range of product bases and don't offer additional services which can increase the loyalty of consumers. The Chewy Autoship program is intended to increase sales and offers more convenient discounts than Amazon does. Specifically, if you subscribe to Chewy's Autoship program you get a 30% discount on your first delivery and 5-10% discounts thereafter. In the case of Amazon, you need to subscribe to at least 5 items to get a 15% discount, otherwise, you will get only 5% discounts on your subscribed items. Currently, the Autoship program represents 70.3% of total sales; the program sales increased 30.3% in Q2 to $1.51 billion.\nChewy is actively working to increase consumer satisfaction levels as the company offers high-quality consumer service. Chewy's consumer support employees have a thorough knowledge of the field and are enthusiastic when responding to consumer enquiries offering 24/7 support. The company sends handwritten holiday cards to customers and even sometimes surprises consumers by sending them hand-painted portraits of their pets. Chewy refunds clients as soon as they return a product within 12 months of purchase (except prescriptions). This is a significantly longer timeframe when compared with Amazon's return timeframe of 1 month.\nDue to its attractive services consumer satisfaction levels are quite high: the Chewy app in the app store has a4.9 out of 5rating. The rating comes from more than 180,000 users, which rank the app best 58th among all US shopping apps. Chewy's app has a4.7 ratingout of 5 in the Google Play market, where it is ranked as the 30th best app among US shopping apps. Meanwhile, the website of the company has53 millionvisits per month with 55% of them entering the site directly (without searches) and another 18% entering via search engines using keywords like Chewy, Chewy.com, etc. So we can conclude that the consumer satisfaction level is quite high as the brand has anNPS score of 35, which is better than Amazon's NPS of25and Walmart's NPS of-4.\nCEO of the company, Sumit Singh, is a visionary professional with significant business experience. Singh held senior leadership positions at Amazon between 2013 and 2017. Between 2015 and 2017, he worked as Worldwide Director of Amazon's consumables businesses (fresh produce and pantry). Before that, he worked in leadership positions with Dell Technologies (DELL) where he accumulated tremendous experience in the technology sector. So his experience in the technology and e-commerce industries are huge assets for the business and investors can rely on his ability to manage the business successfully in upcoming years.\nSo, the pet industry has a more than $130 billion total addressable market, where e-commerce is expected to grab more than 50% market share in 2025. The estimated market share opportunity ($70 billion) is 8 times higher than Chewy's current TTM revenue of $8.1 billion. Considering Chewy's significant competitive advantages and huge TAM opportunity we expect strong growth of the business in the upcoming decade.\nIn Q2 2021, Chewy managed to record 27% revenue growth as 2-year revenue CAGR stands at 37% level. The company reached 20.1 million active users which is a 21% increase YoY. For Chewy it is not only the number of consumers that is important but also sales per active user. This number increased to $404, which is a 14% growth YoY. The company has rather low margins as their gross margin sits at only 27.5%. In Q2, Chewy was able to improve the gross margin by 200 basis points due to the increasing scale of the business. The management was able to achieve marginal improvements despite significant labour shortages as the company was urged to increase wages. At the same time, Chewy was forced to increase its advertisement spending as advertisement input costs increased in the most recent quarter.\nThe company is actively looking for ways to improve its margins. In Q2, Chewy launched its machine-learning driven software, which facilitates order routing and allocation processes. When fully applied the management expects a 70 to 110 basis point EBITDA margin improvement. The application of these technologies helps the company to reduce its dependency on the labour force, which is quite important in the current market environment as there are significant labour shortages and wage increases occurring throughout the USA.\nThe biggest threat for the business is competitive pressure coming from e-commerce behemoths. Due to competitive forces, the company needs to offer discounts and better deals to consumers than its competitors. It should spend heavily to increase the quality of the services offered to overcome competitive threats. Chewy is also urged to invest significant amounts on marketing as marketing expenses represent 8% of total sales. This represents almost 30% of gross profit which hurts the bottom line substantially. However, as the business matures and establishes its strong loyal consumer base, we can expect marketing cost reductions and margin improvements. So due to competitive forces, investors need to accept higher costs in upcoming few years until the business matures and generates more stable income.\nValuation\nTo build a relative valuation model we have used data from the world's largest 15 e-commerce players. We have run a regression model using natural logs of P/S FWD multiples, estimated revenue growth rates and gross margins.\n\nSource: Author\nAs a result, our model yields a 31.42% R square and an F stat of 2.75. Our model indicates that the intrinsic value of the stock is $72.28, 6.2% lower than the current price. However, this is not a significant difference and we assume that the stock is fairly valued at the current price.\n\nSource: Author\nChewy was able to record 51.3% revenue CAGR in the last 5-year period. Assuming only a 20% revenue CAGR for the upcoming 10-year period we get $49.2 billion revenue for 2030. Assuming only a 7% FCF margin and 25 Price to FCF multiple, we get an implied market cap of $86.1 billion for 2030, which yields 10% CAGR for upcoming years. However, we need to notice that these assumptions are quite conservative as the company has a significant total addressable market and the management is successfully improving profitability margins, which can yield even higher valuation multiples.\nConclusion\nChewy is the flagship brand operating in the US pet food and pet care e-commerce segments. The company has a significant total addressable market which is almost 8 times higher than the current sales amount. We anticipate strong revenue expansion and expect that the stock will bring at least a 10% CAGR in the upcoming decade.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":889314974,"gmtCreate":1631109493198,"gmtModify":1676530470319,"author":{"id":"3549621931578219","authorId":"3549621931578219","name":"Hartanto","avatar":"https://static.tigerbbs.com/d56ae74e8bb456512bfca172189a27b5","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Tell me your opinion about this news...","listText":"Tell me your opinion about this news...","text":"Tell me your opinion about this news...","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/889314974","repostId":1133876895,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5794511,"gmtCreate":1631109503679,"gmtModify":1663233565831,"authorId":3549621931578219,"author":{"id":3549621931578219,"authorId":3549621931578219,"name":"Hartanto","avatar":"https://static.tigerbbs.com/d56ae74e8bb456512bfca172189a27b5","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":889314974,"type":1,"supId":0,"prevId":0,"content":"Ovv","text":"Ovv","html":"Ovv"}],"langContent":"EN"},{"id":889308650,"gmtCreate":1631108179370,"gmtModify":1676530469522,"author":{"id":"3561967153760715","authorId":"3561967153760715","name":"Brencakes","avatar":"https://static.tigerbbs.com/c929d65869638dbafe19d96b87310089","vip":1,"crmLevel":4,"crmLevelSwitch":0},"htmlText":"Nice","listText":"Nice","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/889308650","repostId":1133876895,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":44,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1133876895"}