To The Moon

1. Valuation of Chewy

Using the discounted cash flow method, we arrived at an intrinsic share price of USD for Chewy.

Revenue projections: Revenue was projected by breaking down the business segments and using the CAGR for the Consumables, Hard Goods and Others (healthcare services etc.) for pets to project the expected future revenue for Chewy.

Cost projections: Cost of goods sold as well as the Selling General and Administrative costs will continue to increase across the years as Chewy expands. However, as Chewy expands and begins to reap better economies of scale by being able to buy in larger quantities, this can lower the costs of pet products per unit. In turn this could lead to cost savings being passed to pet parents in the form of lower prices to attract more pet parents on the Chewy platform compared to other competitors.

Revenue and cost drivers

Projected Income Statement

Cost of debt: The cost of debt was arrived at using the interest expense divided by the total debt of Chewy. Using the federal statutory tax rate of 21%, it allows us to arrive at an after-tax cost of debt of 1.5%.

Cost of equity: The risk free rate of 3.87% was taken from the Yield-to-maturity for a 10 year long-term unsecured US government bond while the Beta of 0.87 was taken from yahoo finance. The 0.87 beta suggests that Chewy is not too volatile compared to the stock market and is relatively stable. Finally, the equity risk premium was taken from Damodaran’s research of equity risk premiums by country.

Weighted average cost of capital: By calculating the capital structure, and multiplying the respective cost of debt and cost of equity by the weight of debt and equity, it allows us to arrive at a weighted average cost of capital (WACC) of 8.335%.

WACC Calculation

Discounting the Free Cash flows by the WACC allows us to arrive at the respective Present values each year. Summing them together and adding them together with the terminal value using a terminal growth rate of 3.1% equal to the current inflation rate of the US allows us to get an enterprise value of. Subtracting debt and adding cash allows us to get the equity value of which divided by the number of outstanding shares allows us to get an intrinsic share price of USD 28.10 with an upside of 19%.

1. ESG Considerations

There is not much information available regarding the ESG efforts for Chewy, but some considerations as a marketplace business would be to possibly source for local suppliers to deliver locally and reduce emissions from transport. This would reduce the carbon emissions from sale to delivery to customers and help to mitigate any possible supply chain disruptions while meeting customer demand swiftly.

Chewy should ensure the well-being and efforts to encourage diversity among its employees and strong corporate governance efforts in the company.

1. Risks associated with Chewy

Risks of Labour force and Supply Chain Disruptions: Events such as the COVID-19 Pandemic may reduce the labour available and limit their ability to work or travel to certain locations. This may affect the ability of Chewy to meet customer demand and affect the flow of obtaining products from vendors and transporting them to customers in a timely manner. Chewy has faced labour shortages at their fulfilment centres due to the COVID-19 Pandemic which has adversely affected operations. Competition with other retailers for labour may result in higher wages to retain labour and increase labour costs.

Disruptions to Shipping arrangements: Currently, Chewy relies on third-party logistic providers to deliver the products to customers. Inability to negotiate favourable prices and terms with logistic providers would disrupt the efficiency of receiving inbound inventory and the ability to meet customer demand. Other natural factors such as weather changes (e.g. fire, flood, earthquakes) could affect the operations of shipping companies and possibly damage the products ordered by customers.

1. Mitigations

Diversification of supply chain: broadening the suppliers that Chewy has can help to mitigate the disruption from one or two suppliers. Looking for suppliers that are nearer to their storage locations and stocking up more on inventory during periods of expected disruption can help to mitigate supply chain shock such as natural disasters.

Automation of menial tasks: To reduce the impact of the lack of staff, Chewy can work on automating certain tasks in their fulfilment centres to ensure that operations are still smooth and possibly reduce labour costs.

1. Conclusion

In conclusion, Chewy has multiple growth drivers for its business segments, including its entry into pet health and its expansion into Canada. As long as it is able to maintain this trend of growth and cost levels, Chewy presents an interesting opportunity illustrating the rise of the pet sector post pandemic.

1. Sources

[1] Capital IQ

[2] https://www.statista.com/study/78226/humanization-of-the-pet-food-market-in-the-us/

[3]https://www.morganstanley.com/ideas/pet-care-industry-outlook-2030

[4] https://paybacktimepodcast.com/payback-time-podcast/is-chewy-chwy-stock-a-buy/

[5] https://www.gfk.com/press/61-of-canadians-own-a-pet-gfk-survey#:~:text=Canadians%20surpass%20the%20global%20average,same%20as%20the%20global%20average).

[6] https://growtrade.ca/2021/12/01/opportunities-in-canadas-pet-care-market/

[7] https://www.globenewswire.com/en/news-release/2023/08/21/2728752/0/en/Pet-Care-Market-Growth-is-Driven-by-Increasing-Health-Focus-and-Anticipated-to-Grow-at-a-7-4-CAGR-Over-the-Forecast-Period-2023-to-2033-Future-Market-Insights-Inc.html#:~:text=NEWARK%2C%20Del%2C%20Aug.,US%24%20430%20Billion%20by%202033.

*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.

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