Chewy, Inc. (CHWY - Get Rating) in Dania Beach, Fla., is a pure-play e-commerce company geared toward pet products. The company offers approximately 70,000 products from 2,500 partner brands through its chewy.com retail website and mobile applications. CHWY has witnessed significant growth amid the pandemic due to rising pet ownership and the tendency of owners to buy products for their furry companions online. In addition, the company recently entered the pet insurance market and has been working with veterinarian offices to integrate its services into their clinics.

However, the stock has tumbled 34.8% in price over the past six months and 28.3% over the past month as CHWY  struggles to navigate macroeconomic uncertainties.

In addition, CHWY recorded disappointing earnings results in its last reported quarter, raising investors’ concerns about the sustainability of the company’s growth. This could pose a significant threat to its price performance in the coming months.

Here is what could shape CHWY’s performance in the near term:

Grappling With Supply-chain Issues

CHWY’s stock slumped 10% in price on Friday, a day after the pet goods retailer reported mixed earnings and lowered its 2022 outlook, causing several analysts to slash their price targets and issue cautious outlooks.

CHWY’s net sales increased 24.1%, in line with consensus estimates for the third quarter ended October 31, 2021. However, its earnings were severely impacted by current supply chain issues, labor shortages, and high inflation.

Impressive Growth Prospects

Analysts expect CHWY’s revenues and EPS to rise 25.2% and 126.1%, respectively, year-over-year to $8.95 billion and $0.06in its fiscal year 2022. In addition, its EPS is expected to grow 450% next year. Furthermore, the company’s revenue is expected to increase 20.4% year-over-year to $10.77 billion.

Mixed Profitability

CHWY’s 4.5% asset turnover ratio is 323.9% higher than the 1.1% industry average. Also, its $335.17 million cash from operations is 75.9% higher than the $190.6 million industry average.

However, CHWY’s 27.2% trailing-12-months gross profit margin is 24.3% lower than the 35.9% industry average. Also, its 0.49% and 2.1% respective ROA and ROC are 91.7% and 72.3% lower than their  industry averages. Furthermore, its 2.4% trailing-12-months levered FCF margin is 59.7% lower than the  5.9% industry average.

Premium Valuations

In terms of forward Price/Book, the stock is currently trading at 341x, which is 9313.7% higher than the 3.62x industry average. Also, its 2.39x forward EV/Sales multiple is 62% higher than the 1.47x industry average. Furthermore, CHWY’s 2.43x forward Price/Sales is 100.6% higher than the 1.21x industry average.

POWR Ratings Reflect Uncertainty

CHWY has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CHWY has a C grade for Value and Quality. The company’s higher than industry valuation is in sync with the Value grade. In addition, CHWY’s mixed profitability is consistent with the Quality grade.

Of the 72 stocks in the D-rated Consumer Goods industry, CHWY is ranked #44.

Beyond what I have stated above, one can view CHWY ratings for Growth, Stability, Momentum, and Sentiment here.

Bottom Line

The online pet products retailer did an excellent job of exploiting the pet ownership trend during the COVID-19 pandemic, but investors are now concerned about the sustainability of CHWY’s growth because the company is struggling navigating supply chain disruptions and rising inflation. In addition, given its premium valuation and mixed profitability, we believe investors should wait for its prospects to stabilize before investing in the stock.

How Does Chewy Inc. (CHWY) Stack Up Against its Peers?

While CHWY has an overall C rating, one might want to consider its industry peers Societe BIC SA (BICEY - Get Rating), Mannatech Incorporated (MTEX - Get Rating), and Ennis Inc. (EBF - Get Rating), which have an overall A (Strong Buy) rating.

CHWY shares were trading at $54.20 per share on Monday morning, up $2.44 (+4.71%). Year-to-date, CHWY has declined -39.70%, versus a 26.24% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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