Paws, Profit, and Prescription Power

Chewy.

Chewy was founded by a couple of pet-loving entrepreneurs by the name of Ryan Cohen and Michael Day, with a bold vision to change the traditional pet retail game. Chewy’s goal is to revolutionize the pet industry by becoming the leading e-commerce destination for pet products, known for its customer-centric approach. Chewy offers a wide array of pet supplies, food, medication, and services through a seamless online platform. Founded in 2011 the company quickly grew into one of the largest companies in the segment, it went public in 2019 and is now valued at over $15 billion. 

Chewy operates in a large industry with an almost $200 billion TAM. The company’s mission is to become the most trusted and convenient destination for pet owners everywhere. Chewy wants to become the Amazon for pet owners across the U.S. by becoming a part of your pet’s daily life with its large product spread. Chewy isn’t just a scrappy startup anymore they are growing into a great dane of the sector. 

Chewy isn’t just a niche company for pet lovers, they have become a dominant e-commerce company for all pet owners. Their latest power moves include a major rise in revenues, recurring sales, profitability, stock buybacks, and doubling down on pet healthcare with Chewy Pharmacy.  Chewy turned pet food into a SaaS with 80% of its revenue stemming from recurring subscriptions. After years of burning cash, Chewy in 2024 was able to report a positive net income. 

In Chewy’s most recent quarter, they reported a revenue of $2.88 billion reflecting a 4.8% YoY increase. The company also reported a net income of $3.9 million, a significant turnaround from the year prior when they reported a net loss of $35 million. While this net margin is razor-thin it shows the company is focused on operational efficiency and discipline. Chewy has reported a gross margin of 30%, fueled by its pricing optimizations on its high-margin products like private label brands and Chewy’s pet healthcare services. The company's bull shit earnings also surged to $138 million up 68% YoY.

Despite small profitability, Chewy’s valuation reflects a trans identity, part e-commerce part pet industry disruptor. Chewy’s valuation metrics reflect a premium valuation over its peers with a PE Ratio of 40 and an EV/EBITDA ratio of around 18x. This signals investor confidence in the company’s continued growth from its strong brand loyalty, recurring revenues, and asset-light business model compared to traditional brick-and-mortar competitors. The company also has a high P/B Ratio from its intangible assets, brand value, and tech infrastructure. Chewy’s premium valuation lies in its data, customer relationships, and logistics networks.  

Chewy’s cash flow performance in its Q3 2024 report shows strong growth, with an impressive $183 million in operating cash flow. This was fueled by improved capital management and optimized inventory levels, along with the company’s ability to turn sales into cash effectively. This is a critical metric for e-commerce businesses as they are often known for burning cash. The company’s free cash flow also skyrocketed over 200% YoY to $152 million in Q3 2024, allowing it to invest in growth opportunities, strategic acquisitions, and return capital to shareholders with stock buybacks. 

Chewy operates in a booming industry that is rapidly growing as pet lovers continue to spend on their pets. This ever-booming industry is growing as people humanize their pets along with the rising pet ownership rates and premiumization of pet products. Chewy sits at the intersection of e-commerce, pet retail, and pet healthcare unlike traditional pet retailers that rely on physical stores, Chewy is direct-to-commerce that offers customers unparalleled convenience. Chewy has positioned itself as a go-to platform for millennial and Gen Z pet parents who prioritize ease and speed. Chewy’s growth has aligned with macro trends like increased spending per pet, growth in subscription-based commerce, and the rise of online pet healthcare services. 

Chewy’s growth engine is powered by two products, the autship is a subscription service and Chewy’s pharmacy. Chewy’s subscription services account for a staggering 80% of total sales. Autoship allows customers to schedule recurring deliveries of pet essentials like food, treats, and supplies that ensure convenience for customers. This creates customer loyalty, predictable revenue, and high customer lifetime value as customers who enroll in Autoship tend to stick around longer. In 2018 Chewy Launched its Pharmacy product, which has rapidly grown into the company’s fasted growing segments. This product taps into the $40 billion U.S. pet healthcare market, offering prescription medicine, pet wellness products, and even telehealth consultations. This new product not only expands the Chewy product offering but acts as a strategic moat against competitors. 

Chewy faces strong competition from well-known and well-funded pet retailers and e-commerce giants. Its primary competitors include Amazon, Walmart, Target, Petco, and its former parent company PetSmart (it is Pet Smart, not Pets Mart). Amazon is the king of the e-commerce industry and poses the biggest threat to Chewy due to its massive logistics network, pricing power, and growing pharmaceutical segment. Chewy also competes with traditional pet retailers like Petco and PetSmart, while they have a strong brick-and-mortar presence they lack e-commerce, customer services, and seamless digital experiences. Despite this competitive pressure, Chewy holds a lead in the online pet retail space with over 50% market share within the U.S. pet e-commerce space. 

Since its founding, Chew has built a strong moat that comes from four key pillars of its business: customer loyalty, Autoship ecosystem, scale and logistics, and its expansion into pet healthcare. Chewy is famous for its handwritten thank you notes, surprise pet portraits, and 24/7 customer support, this legendary customer service isn’t just marketing fluff but a strategic weapon. Chewy Pharmacy and telehealth services create a high-margin niche within the ecosystem, that makes it hard for new entrants to compete effectively. Its Autoship programs act as a SaaS that ensures low customer acquisition and predictable cashflows. Chewy’s moat isn’t just about selling cat foot but about owning the entire pet parent ecosystem from food and health to health and wellness. 

Chewy’s organic growth stems from its recurring subscriptions, new product offerings, and customer engagement strategies. Chewy is also expanding its private-label brands (foot/accessories), which offer higher profit margins than traditional third-party brands. Additionally, the Chewy Pharmacy is becoming a major growth as they are tapping into a very lucrative pet healthcare market with prescription medications, wellness products, and telehealth services. Chewy also has a strong innovation pipeline packed with initiatives that will deepen customer relationships and unlock new revenue streams as they look to explore international expansion. 

While Chewy has historically been fueled by organic growth, it has shown a willingness to make strategic acquisitions that will enhance the company's growth. In 2017, Chewy was acquired by PetSmart for $3.5 billion allowing the company to rapidly scale and invest in its infrastructure. Since its IPO Chewy has spun off from PetSmart and now operates independently. Looking forward, Chew has significant potential for inorganic growth through acquisitions and strategic partnerships by potentially acquiring pet technology companies or veterinary telehealth startups to enhance its healthcare ecosystem. 

Several catalysts that could supercharge Chewy’s growth in the near and long term include the continued expansion of Chew Pharmacy, supply chain optimization, and continued personalization. Chewy’s mobile app also presents a large growth opportunity as mobile users tend to be more engaged and spend more frequently. Optimizing the company’s logistics network is critical as the company has continued its investments in automated fulfillment centers and AI-driven inventory management programs. Chewy is leveraging machine learning to optimize pricing strategies, customer behavior, and improve product recommendations which will directly boost conversion rates and average order size

The U.S. pet industry is valued at over $100 billion and the pet healthcare TAM is valued at over $40 billion leaving significant room for Chewy to grow. E-commerce penetration in these markets is still relatively low at under 30% penetration. Globally the met market is expected to be valued at over $330 billion by 2030, presenting future opportunities for Chewy to expand internationally. With emerging trends like pet humanization, increased premiumization of pet products, and the rise of the company’s Autoship business model Chewy is positioned to capture a large share of the global pet market. Chew is investing heavily in automation, robotics, and supply chain efficiencies that will enable faster delivery times and lower costs. 

While Chewy’s DTC model and automated subscription fulfillment networks are the company’s key strengths, they are exposed to operational risks. Chewy relies upon its logistics infrastructure to deliver seamless experiences, any disruptions could lead to delayed shipments, stockouts, and hurt customer satisfaction. As Chewy scales they face risks related to maintaining inventory across multiple fulfillment centers and the company’s dependence on third-party shipping providers (FedEx & UPS) makes them vulnerable to labor strikes and capacity constraints that could inflate costs or hurt delivery speeds. Chewy has a strong history of exceptional customer service and as the company tightens its operational costs to improve margins could risk alienating loyal customers. Additionally, the company may face challenges in retaining top talent, a failure to do so could slow company growth.

Chewy also faces risks related to regulatory changes, competition, and market demand fluctuations. As Chewy expands its product offerings to pharmacy and telehealth services they face healthcare regulations and licensing requirements that vary state by state. Navigating the complex regulatory environment adds both compliance costs and legal risks, any missteps could lead to fines, legal disputes, or even license renovation that will hurt the company’s revenues. While Chewy’s customer loyalty has helped create a strong moat, competitors with deeper pockets could engage in price wars and similar tactics that could lure customers away. Additionally, customers could shift back to traditional brick-and-mortar shopping which could hurt the company's revenue. 

With Chewy’s premium valuation, they are exposed to stock price sensitivity and assumption-based risks. Any slowdown in revenue, margin compression, or failure to innovate its product line could lead to a sharp correction in stock price. Investors have also priced in the significant upside from Chewy’s healthcare and potential international growth expansion. If these assumptions are overly optimistic due to regulatory hurdles, competitive pressures, or failure to execute Chewy could face multiple compressions. Chewy has also committed to aggressive stock buybacks totaling $875 million, although this signals confidence it also reduces the company’s cash reserves in the event of an economic downturn.  

Chewy has successfully been able to transition from a high-growth e-commerce disruptor to a profit hound. Its subscription model accounts for 80% of its total sales and provides predictable recurring revenue. Chewy’s recent move into the Pet Pharmacy business taps into a very lucrative $40 billion pet healthcare market. Chewy’s competitive moat is rooted in its customer loyalty which sets them apart from its competitors. The company is heavily invested in its innovation, AI-driven personalization, and telehealth services ensuring that Chewy stays ahead of its competitors and everchanging market dynamics. 

The bad boys over at Azar Capital Group will be giving Chewy a ‘BUY rating due to its strong expansion plans, pharmacy business, and the unwavering trend of pet owners spending aggressively on their pets. We believe that the pet industry is recession-proof, and Chewy can capture both routine spending (food & supplies) and healthcare spending. Investors should watch for its expansion into new markets, strength in its recurring revenues, pharmacy business growth, and continued investments in supply chain optimizations. As pet parents continue to spend money and over fist on their furry friends, Chewy is well positioned to capture an increasing share of the emotionally charged industry.

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.