Keith Gill, aka Roaring Kitty, has a new favorite action.
The man behind the GameStop The meme stock phenomenon filed a statement with the Securities and Exchange Commission (SEC) on July 1 showing that on June 24, it took a 6.6% stake in Chewy (NYSE: CHWY)As of the close of trading on July 3, that stake was worth about $217 million. It’s a huge bet for Gill.
The combination of Gill’s optimism and his social media following has made the stock extremely volatile. Shares surged higher when Gill posted a photo of a cartoon dog on X in late June, and they moved again after the SEC’s disclosure. But Chewy’s stock has already given back nearly all of the gains it made since Gill made his big purchase, and then some. That gives those who might be interested in following him into the stock an opportunity to get in at a similar price.
Should retail investors seriously consider taking a cue from this YOLO bet from the king of meme stocks?
The premier online retailer for all things kittens (and other pets)
Chewy is the largest online retailer of pet products. Pets are a common part of American homes, and the amount people spend on them is growing rapidly. The American Pet Products Association predicts that Americans will spend more than $150 billion on their pets this year, up from $90 billion in 2018.
This puts Chewy in a favorable position. In online retail, scale matters. It allows orders to be processed and shipped more efficiently, reducing one of the biggest expenses in e-commerce. Chewy uses this advantage in two ways. First, it is able to offer competitive prices on pet supplies and over-the-counter medications thanks to its operational efficiencies. Second, it leverages its existing customer base to expand into new verticals.
Chewy has been ramping up its advertising and health efforts in particular. Veterinary care and pharmaceuticals account for more than 25% of the $150 billion pet industry spend. This is a huge market that Chewy can capture a share of.
Chewy Health is still in its early stages. The company has opened four veterinary clinics this year and plans to open four more by the end of the year. A greater focus on health products in its online sales led to strong gross margin expansion in the first quarter.
Similarly, advertising sales boosted revenue and gross margin. The company expects its advertising revenue to increase to 1% to 3% of its total revenue. While this may not seem like much, advertising sales can have a significant impact on the bottom line because ads generate high operating margins.
A loyal clientele
Although Chewy’s active customer base has declined since the height of the pandemic, the company’s core customer base is growing.
Customers using the recurring autoship feature accounted for 77.6% of sales in the first quarter, the highest percentage the company has ever recorded.
Autoship is a win-win for Chewy and its customers. Customers get small discounts on items they buy regularly, like treats or medications. Chewy gets better predictability around its customers’ orders, can bundle more items together to reduce shipping costs, and benefits from improved customer retention.
The company is working to increase customer loyalty with a new paid membership program, Chewy Plus, that offers unlimited free shipping, rewards and exclusive perks. The program is currently in testing.
Autoship, its new membership program, and its growing healthcare business (with physical locations) can be great ways to drive customer loyalty, and they can all work together.
Is Chewy Stock a Worth Buy?
Based on recent price action, Chewy stock appears to represent good value.
The company’s enterprise value is about 20 times its forward EBITDA estimates. It is expected to see strong bottom-line growth from rising revenues and expanding margins from its advertising and healthcare efforts. Analysts currently expect its earnings per share (EPS) to rise 178% this year and 68% next year.
EPS growth was also supported by the $500 million share repurchase program management announced in conjunction with its first-quarter earnings report. It executed that share repurchase in one fell swoop last month, purchasing 17.55 million shares at $28.49 each of a single entity. It still has more than $500 million in cash on its balance sheet, according to its first-quarter report, and it generates positive free cash flow every quarter.
While a stock buyback at that price may not seem particularly impressive given that the stock is trading around $25 today, it suggests that management felt it was a fair price for the stock. And management has better information about the company’s financial future than anyone outside the company.
With strong growth ahead of it, Chewy is a company worth owning. Investors should just be aware that Gill’s involvement in the stock could create significant volatility in the stock price.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Chewy. The Motley Fool has a disclosure policy.
Roaring Kitty Owns $217 Million in Chewy Stock. Should You Jump in Now? was originally published by The Motley Fool