Don’t get chewed up by these expensive pet supplies PickC

Some investors might wonder if Chewy (NYSE:CHWY) stock will end up like Pets.com stock in the 2000s. It’s unlikely that Chewy stock will follow a similar path, but if you’re concerned that today’s market environment resembles the upswing of the dot-com bubble, perhaps now is the time to take profits.

Pets.com may actually have been too ahead of its time. That’s because 20 years ago, many people weren’t ready to buy pet supplies online. However, today people are used to buying almost everything online.

In this way, Chewy’s subscription-based business model takes advantage of online shoppers’ tendency to seek convenience. However, in times of high consumer prices, shoppers may have to choose lower price over convenience.

This could potentially be problematic for Chewy, and forward-thinking investors should do their due diligence instead of following the crowd and chasing Chewy stock.

High pet food prices are the new normal

Despite no company-specific news, Chewy shares rose nearly 14% on Tuesday, but that’s nothing compared to what’s happened in 2020 and early 2021. Stock prices soared.

But that was then and this is now. It’s true that Chewy stock is rising, but don’t expect a repeat of the 2020-2021 rally. The COVID-19 catalyst is in the rearview mirror. Additionally, market sentiment regarding risks in 2021 has been dampened by persistent price inflation and steady interest rate increases in 2022.

Speaking of inflation, many pet owners have probably noticed the shocking price tags on pet supplies recently. Chewy CEO Sumit Singh clearly recognizes this problem, admitting it to Yahoo! He finances that there is an “unprecedented amount of inflation that has passed through the system.”

To quantify the “unprecedented amount” of pet supply inflation, Singh observed that while pet food price inflation is typically 2 to 4 percent, it has risen by “double-digit percentages” over the past three years.

Unfortunately, pet owners shouldn’t hold their breath if they’re hoping to see their pet supply costs alleviated significantly in the short term.

In response, Singh predicts that ‘incremental discounts’ will appear in ‘the second half of this year’. But the Chewy CEO said, “We don’t really expect any structural changes that will change prices going forward.”

Nonetheless, Singh remains very optimistic. He fully expects “higher profitability” despite the impact of price inflation and promised to “pass that value back to consumers.”

Regarding this, both investors and consumers must adopt the attitude of ‘I will believe it when I see it.’

Solid start and high valuation

“We’re off to a solid start to fiscal 2024,” Singh declared after Chewy announced its first quarter results.

Indeed, there is no denying that the company’s revenue growth has been ‘robust’. But Chewy’s sales growth was nothing short of amazing.

Drilling down to the first quarter of fiscal 2024, Chewy’s net sales increased 3.1% year-over-year to $2.88 billion. This was a decent, but not dramatic, result and came in slightly above analysts’ consensus estimate of $2.85 billion.

What’s even more impressive is that Chewy’s adjusted earnings were 31 cents per share, compared to 20 cents in the year-ago period. Moreover, the results easily surpassed Wall Street’s demand for earnings of 20 cents per share.

It’s certainly a positive sign that Chewy’s board of directors has approved up to $500 million in stock buybacks. Although confidence does not certainly guarantee results, it does indicate management’s confidence in the company’s future prospects.

Returning to the topic of convenience, Chewy’s self-delivery customer revenue in the first quarter of 2024 hit $2.2 billion, up 6.4% year-over-year. Clearly, some shoppers continue to enjoy Chewy’s subscription options. But despite uncomfortably high pet food prices, it’s unclear whether this will last.

That question will only be answered for sure now and in the coming quarters. But it appears the market has already priced in Chewy’s rapid, sustained growth.

This is where memories of Pets.com start to come flooding back. Believe it or not, Chewy’s GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio is 135.94. To provide some context, the median P/E ratio for the sector is 17.87.

Singh asserts that Chewy’s “value proposition continues to resonate with customers.” That may be so, but the company’s value proposition shouldn’t resonate with cautious investors.

Again, Chewy stock probably won’t crash like Pets.com stock did 24 years ago. However, if Chewy’s P/E ratio and stock price eventually collapse, it has the potential to become a poster child for valuation excess in the mid-2020s.

So, I encourage you to take a closer look at the Chewy-related data mentioned earlier. Meanwhile, they should seriously consider taking profits and finding better deals in the consumer goods sector.