the way dogs pick up their favorite bones: they just don’t let go.
People may come to the pet retailer first to buy bags of food, but soon they buy higher margin products like leashes, toys, and clothing. The average spend drops from $ 400 in the second year to $ 700 in the fifth year, says Marc Regenbaum, portfolio manager of the Neuberger Berman Long Short Fund. Chewy, he says, has a real knack for retaining customers and convincing them to spend more.
This is why Regenbaum, unlike many investors, sees the company’s stock (ticker: CHWY) as more than a pandemic game. It is true that sales of pet products increased in 2020 as legions of people working from home discovered they could adopt pets. Chewy’s own sales jumped 47%. With the economy reopening, Chewy’s stock has slumped about 30% since February, to hit $ 84.22 recently. But for Regenbaum, this is just a sign that the market does not understand the sustainability of the company. He likes Chewy’s long-term outlook.
The most underrated aspect of Chewy’s business, Regnebaum says, is its auto-delivery program. Customers sign up for regular deliveries of dog food, cat litter and other products they know they’ll need, and the company rewards them with discounts. Almost 70% of Chewy’s revenue in 2020, or roughly $ 4.9 billion, came from the program last year, Regenbaum said.
“It’s basically recurring revenue,” he says. “It’s almost like software-type models. You don’t get that very often in a consumer-oriented business.
The Dania Beach, Florida-based company with a market value of $ 35 billion was founded in 2011 and went public in 2019. This is a real story of growth, its customer base has almost doubled in over the past two and a half years for nearly 20 million. Today, the company extends beyond its retail e-commerce roots into telehealth services. It should emerge as a “platform for pet products and services,” Regenbaum believes.
Chewy announced its first-ever first quarter profit and Regenbaum expects full year profit. Revenue is expected to grow by around 25% for the full year of 2021, to over $ 9 billion, and will likely exceed $ 11 billion in 2022, he said. Chewy’s adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, could reach over $ 200 million in 2021 and then double in 2022, thanks to “lots of opportunities for margin expansion,” Regenbaum says. He expects Chewy to report earnings per share of around 20 cents this year, which could rise to 50 cents in 2022.
Regenbaum brings more than an analyst’s eye to all of this. “I have a pandemic puppy,” he says. He’s a mini-labradoodle named Winnie, and the experience gave Regenbaum important insight into reopening the economy: “Dogs don’t go back to work. For better or for worse, we all need to take care of this dog.
Write to Luisa Beltran at [email protected]