This Top Growth Stock Is on Sale in April

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Chewy (NYSE:CHWY) was my top growth stock to buy a month ago, as the stock price of the online pet products retailer had pulled back substantially amid concerns that it would lose momentum in a post-coronavirus world. But the company’s prospects indicated that those fears were unfounded.

Now Chewy’s latest results for the fourth quarter of fiscal 2020 that ended on Jan. 31, 2021, provide further proof that its stellar growth is here to stay. The company’s revenue and earnings blew past Wall Street’s expectations. Investors liked what they saw, and share prices spiked thanks to a surprise profit.

What’s more, Chewy shares have slipped further over the past month, which means there’s a better opportunity now for investors to buy into this high-growth company. Let’s see why it would be a good idea to take advantage of this opportunity and buy Chewy stock.

CHWY data by YCharts

Chewy kept up its terrific growth in a post-COVID scenario

Chewy’s fiscal fourth-quarter revenue shot up 51% year over year to $2.04 billion, outpacing the company’s full-year revenue growth of 47.4%. The company’s gross margin jumped 300 basis points over the prior-year period to 27.1% during the quarter, while the net margin increased 550 basis points to 1%.

The revenue and margin gains pushed its earnings to $0.05 per share for the quarter, reversing the year-ago period’s loss of $0.15 per share. Wall Street was expecting Chewy to incur a loss of $0.10 per share on revenue of $1.96 billion. It easily cleared those estimates thanks to a solid increase in its customer base and an uptick in spending by each customer.

Chewy ended the fourth quarter of 2020 with 19.2 million customers, a big jump of almost 43% over the prior-year period. Net sales per active customer jumped 3.3% year over year to $372. More importantly, Chewy’s new customer acquisition pace increased in the fourth quarter compared to the third quarter. The company saw a 40% spike in reactivations of idle customers — those who haven’t made purchases on Chewy in the past year — during the quarter, while customer retention went up by 240 basis points.

Image source: Getty Images

These numbers tell us that Chewy is successfully executing its strategy of adding new customers and driving additional spending. In fact, Chewy’s wallet share among its 2020 customers was 12% higher than the customers it had added in 2019.

This strategy of driving increased wallet share has helped Chewy increase its first-year contribution profit (calculated as gross profit minus variable costs) from each new customer at an annual rate of 16% over the past two years. The results are visible in its improved bottom-line performance last quarter.

Also, it is worth noting that Chewy is building a sustainable stream of revenue for the long run through its Autoship subscription program. Autoship revenue was up 46% year over year in the fourth quarter to $1.39 billion and accounted for 68.2% of the company’s total sales. The Autoship program allows pet parents to automatically reorder their recurring needs from Chewy, so a large portion of the company’s revenue from this segment looks stable over the long term.

A bright future lies ahead thanks to secular catalysts

Chewy’s business has remained strong even a year after the novel coronavirus pandemic shook the world. The gains that the company has scored over the past year seem here to stay, and that’s evident from its guidance.

Chewy anticipates revenue between $2.11 billion and $2.13 billion this quarter, a jump of 30% to 31% over the prior-year period. The company anticipates 24%-to-25% revenue growth for the full year, while the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is expected to increase in the range of 50 to 100 basis points over fiscal 2020.

However, don’t be surprised to see Chewy grow at a faster pace in fiscal 2021. The company has taken just two years to hit the $2 billion quarterly sales mark after taking 7.5 years to reach its first $1 billion in quarterly sales. There’s no doubt that the pandemic has aided this growth, as pet parents staying home had to resort to online supplies. But at the same time, the pandemic has created long-term growth drivers for Chewy.

Chewy estimates that the number of pet-owning households increased 5.7% in the U.S. in 2020, a huge boost over the five-year compound annual growth rate (CAGR) of 0.6%. This has increased the company’s addressable market. Additionally, the online pet products market still has a lot of room for growth. The online channel accounted for 30% of the pet retail food and supplies category last year. That number is expected to reach 53% by 2025.

With Chewy taking proactive steps to boost its market share by adding new customers and encouraging them to spend more on its platform, the company looks well-placed to maintain its impressive growth rates over the long run by taking advantage of the secular catalyst it is sitting on. That’s why investors looking for a potential growth stock should take advantage of Chewy’s recent drop, as it could surge higher in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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