Macro-level issues remain rubbery in the niche

Pets.com stocks in the early 2000s were the child star of stocks that skyrocketed, then exploded and disappeared as part of the dot-com crash. Clearly, consumers weren’t ready to embrace e-commerce in pet supplies.

While Pets.com may be ahead of its time, the online retailer soft (NYSE: CHWY) – which drifted from PetSmart into a public entity in 2020 – has had some success, in part thanks to a pandemic shift towards greater use of e-commerce.

While Chewy stock doesn’t quite follow the same trajectory as Pets.com, there has been an undeniable boom and bust movement in the stock price since its IPO in June 2019. Nonetheless, a rally in the share price could be considered from Chewy’s. revenue growth is noticeable – and some “stubborn” management determination to expand the company’s business model may well steer Chewy towards a profitable tax profile.

Chewy’s top line growth remains strong

To determine if Chewy is suitable as a value game, potential investors need to weigh the positive points of the company against a glaring negative.

On the bright side, Chewy’s balance sheet appears to be improving as the company’s cash and cash equivalents increased in the first three quarters of the year (ending October 31). Also, in the same time frame, Chewy’s total assets grew from $ 1.7 million to $ 2.2 million, but then the company’s total liabilities almost exactly mirrored those numbers.

The star attraction for the bulls, however, is Chewy’s peak trajectory. The company’s third-quarter 2021 net sales of $ 2.21 billion showed a 24.1% year-over-year improvement, while quarterly gross margin of 26.4% indicated an expansion 90 basis points year over year – not too shabby.

The big downside for Chewy

But while Chewy’s sees its sales increase and occupies a strong position in its niche market, the online retailer is still not profitable in terms of results. Chewy’s third quarter net loss of $ 32.2 million is not much of an improvement over the $ 32.8 million net loss in the third quarter of 2020. On the other hand, the net loss of 10 The company’s $ 2 million for the first three quarters of 2021 combined shows vast progress against the net loss of $ 113.5 million in the first three quarters of 2020.

Still, the lack of net profitability hinders some investors. CEO Sumit Singh blamed Chewy’s negative third quarter results on continued supply chain disruptions, labor shortages and rising inflation. Chewy recorded $ 93.3 million in expenses under the “Inventories” category for the first three quarters combined, which certainly reflects an inflationary economy.

Chewy goes beyond toys and treats

One way to offset the increased cost of inventory is to generate income from sources that are much less affected by such things as availability of supplies, shipping, sorting, or labor costs. . That’s part of why Chewy recently announced a partnership with a pet medical insurance provider. Trupanion (NASDAQ: TRUP). Through this partnership, Chewy will be able to offer its online customers (or more specifically their pets) preventive and wellness care plans and comprehensive insurance plans for accidents, illnesses. and chronic conditions. In this model of care, Chewy will use Trupanion’s software to pay vets directly, thereby (hopefully) reducing the out-of-pocket expenses for the parents of the animals.

At the very least, working with Trupanion should diversify Chewy’s business model. Still, it remains to be seen whether Chewy’s customer base of 20 million pet parents will choose to sign up for more than just pet products and food.

Are investors getting the wrong tree?

Investors looking for companies that can sidestep macro-level issues like inflation and supply chain bottlenecks are unlikely to find a solution in Chewy.

For now at least, food, toys, and treats are still Chewy’s bread and butter. But branching out into pet health care could help the company move away from the global issues that seem to haunt so many product vendors today.

Chewy continues to generate significant sales growth. The company’s profit losses are at least under control, even if they are not declining at the rate that all investors want. This is still a relatively young company focused more on growth than profit at the moment, so patience is needed. Ultimately, Chewy investors must remain risk-tolerant e-commerce bulls to the core.