Chewy is the largest pet e-commerce platform in the US. It has seen tremendous growth since its founding in 2011, with sales reaching $6.8 billion in 2020. Chewy benefits from the expanding pet market, which is expected to reach $94.6 billion by 2025. The shift to online shopping also drives Chewy’s growth, as the online channel took 22% of total pet spending in 2019 and is expected to keep rising. With excellent execution and pet-focused services like subscription orders and two-day delivery, Chewy dominates the online pet care space. While Chewy is still losing money as it invests for growth, it has huge potential as the leading pet e-commerce platform.
The pet care market has strong growth tailwinds
The pet industry is large and resilient – American Pet Products Association estimates the market at $56.1 billion in 2019 growing above 5% annually over the next 5 years. People view pets as family and keep spending on them even during recessions. This provides a positive underlying trend for Chewy. On top of this, e-commerce is taking an increasing portion of pet spend. While online shopping only accounted for 7% of total spending in 2015, that figure was 22% in 2019. With the convenience of home delivery and lower prices, the online channel will likely keep taking share going forward. Chewy is the best positioned player to capitalize on these trends.
Chewy provides excellent customer experience
Chewy focuses narrowly on pet products and services. It offers convenient auto-ship subscription orders that align with pet consumables’ need for regular replenishment. Chewy also enables two-day delivery on most items, meeting pet parents’ expectations. Such pet-focused services and fast fulfillment underpin Chewy’s industry leading Net Promoter Score, which was over 80 in 2020. High customer satisfaction translates to strong retention and growth for the company. On the back of high-quality services and execution, Chewy grew active customers 33% and 38% year over year in 2020’s fiscal Q1 and Q2.
Chewy has robust growth and improving unit economics
Thanks to the positives outlined above, Chewy has maintained hypergrowth at scale – 2020 net sales grew 47% year over year to $6.8 billion. Large revenue base coupled with high growthmakes Chewy very attractive for investors. While still losing money as Chewy invests in growth, there are signs unit economics are improving – gross margins expanded from 21.3% in 2018 to 28.9% in 2021 as Chewy scales. Fixed cost leverage also kicked in during COVID, leading to positive EBITDA months in 2020. As long as Chewy maintains excellent customer experience, it should see margin expansion and profitability over time. Trading at 2.9x 2023 revenue, Chewy seems attractively valued given the growth outlook.
With strong pet market tailwinds, leading online position through excellent services, and robust hypergrowth, Chewy has huge potential ahead. Investors buying at current valuations can benefit from years of expansion still to come.