S2E43 – Chewy (CHWY) Stock Review

Key Timecodes

• 00:16 – MOS/Financials
• 01:57 – Meaning / Business Model
• 08:29 – Moat / Competition
• 10:14 – Management / CEO
• 12:54 – Conclusion

Transcription

[00:00:00.250] – Sean

Hey. In this video, I’m going to review Chewy. We’re going to do a 4Ms analysis. So we’ll use Tykr for the first M, that margin of safety. And then we’ll talk about the meeting mode and management.

[00:00:09.830] – Sean

Let’s dive in.

[00:00:15.630] – Sean

When you log in to Tykr and look up Chewy, you can see the school score is an 84 out of 100, which is outstanding, really strong financials. And then the margin of safety is a 90%. We can see the share price is 32 and the fair value is 163. So a lot of upside potential there. We won’t spend too much time on the math of the numbers because Tiger does that heavy lifting for us.

[00:00:38.200] – Sean

But let’s just take a quick look. Sometimes I’ll do this, I’ll go to the financials tab and I’ll look at the year over year and then quarter over quarter to see how things are looking. So if you just go to revenue here, this is impressive. It’s just year over year improvement. We’ll break that down a little bit based on the history.

[00:00:55.350] – Sean

So revenue looks outstanding. Net income is still negative, but you can see here that the numbers are moving in the right direction. So, for example, it was like two years ago, negative 252 million. Net profit negative 92. And then now it’s negative 73.

[00:01:13.340] – Sean

So again, moving in the right direction, earnings per share, which is very similar to your net income. Net income or EPS earnings per share is your net income divided by outstanding shares. So here very similar story that EPS is moving in the right direction. We go from a negative $0.63, negative 23 to negative 18. So moving in the right direction, cash flow.

[00:01:39.960] – Sean

If we go over there, we can see there in our positive just over 8 million, which is good. And then we jump to the balance sheets. And I’m just going to look at assets here. I can do a quick summary of everything else, but the assets are increasing nicely year over year, which is fantastic. But what I’d like to do is I want to spend a little more time on the meaning and the mode.

[00:02:00.900] – Sean

We’ll also talk about management, but the meeting was really interesting in this business. Now when I do a stock review, I’d like to really dive in. I do take a few hours to dive into a stock, understand where it’s been. I love learning about the history of businesses. It gives me context on where business has been and where it’s going.

[00:02:20.130] – Sean

So this is really fascinating. I did not know this. They were founded in 20 11, 20 12. Revenues already hit 26,002,014. Revenues hit 205,002,015, they already hit 423,000,000.

[00:02:37.450] – Sean

So really fast growth. What they did there is they had a few people come over from Amazon, Pet, Smart, Whole Foods wayfare. So a lot of strong ecommerce leadership in this business to really help grow the company. Really impressive. 2017, just six years after the company Was Founded, the Revenues Grew to 2 billion.

[00:02:58.950] – Sean

It captured 51% of the US. Market of online food sales, which I thought was impressive. They really started making a lot of noise. And then Petco and PetSmart approached Chewy to buy the company outright. At the time.

[00:03:13.040] – Sean

They’re actually looking to go public. So what happened is Pepco offered partial stock as well as partial cash to buy out the company. Pet smart came in with a better offer. They said, hey, we’ll do all cash and you can keep your brand. You can keep the true brand.

[00:03:28.150] – Sean

So they went with that, which is awesome. Fast forward a few years. That was 2017. We get to 2019. Chewy went public.

[00:03:40.110] – Sean

And then soon after, private equity company BC Partners. What they did is they actually separated Chewy from PetSmart. In this case. So they are now their own business, which is great. So the growth was just incredible.

[00:03:55.840] – Sean

I know there’s a lot of people who talk about Chewy Motley fool, for example. There’s a few people on the show that do really love this business. They have certainly made a lot of Noise in the last few Years, but let’s Continue On. So how does Chewy make money? They’re pretty easy Business to understand.

[00:04:15.280] – Sean

We’ll break it down a little bit. So they’re an Ecommerce business. They have a little over 2000 Brands, 55,000 SKUs or individual Products on the site. About 70% of their revenue is from consumable products. So, like dog food, cat food treats, so and so forth.

[00:04:34.210] – Sean

About 30% is from hard goods that’d be toys or, like, beds and so on and so forth. What really is impressive about this business, and this is good to know for anybody out there who’s creating or growing ecommerce company on your own is they added auto ship. So what auto ship does is it kind of transitions an e commerce business into a SAS business. This is possible when you have an e commerce business selling like a consumable product. Like food, for example, is great.

[00:05:02.460] – Sean

In this case, pet food. So what I did, I’ve been a customer of Chewy for years, is I can, as a consumer, set up auto ship so a bag of dog food can be sent to my front door every month. When I set that up, it’s 35% discount the first month and then 5% discount thereafter. And what that does is it creates that steady stream of revenue for Chewy and I get a discount at the same time that’s actually 60% of e commerce revenue is from Auto ship being set up. So really smart play there by Chewy.

[00:05:37.960] – Sean

And then they also added care. Plus it’s their pet health insurance. I love insurance. Great business model. There is no product.

[00:05:48.250] – Sean

There’s no supply chain. You’re not selling something physical against it. It’s Reoccurring. We learned through the years. Warren Buffett bought geico.

[00:05:57.230] – Sean

It was one of his best, if not his best investments ever. He’s made a lot of money through that investment. So insurance is really a smart play. A nice little bolt onto the business. We’re going to talk about the modes and a little bit.

[00:06:12.350] – Sean

So I did a little homework on really what sets Chewy apart and I have to say their customer service. This doesn’t happen all the time, but there’s an article I found unfortunate.com that states that at times, unfortunately for us pet lovers out there, our pets don’t live as long as us. Cats and dogs maybe live between ten and 20 years at most. And it’s sad to say goodbye. And in this case, Chewy has sent personal letters, cards, flowers to people who have lost their pets.

[00:06:46.560] – Sean

I thought that’s super smart play. You make Chewy memorable and you’ll probably remember those moments for the rest of your life. You’re probably creating customers for life. So I really believe Chewy, you need to lean into that. That’s a really smart play.

[00:07:04.110] – Sean

I want to just skim through the news a little bit. I like to see what’s the latest news on a business. Just a few highlights. There’s a really well written article here from Seeking Alpha. You can go to the site, click on the link.

[00:07:15.730] – Sean

I thought it was outstanding. I’m just going to summarize some of the highlights. So I thought this was a really cool idea. They have goodie boxes which are competitive to BarkBox. Essentially it’s another reoccurring revenue product where you can have treats and toys sent to your door for, let’s say, your dog every month.

[00:07:34.360] – Sean

Really smart play there. Of course, they did emphasize care. Plus insurance was really smart play. And this was interesting too. They give back or donated $100 million to 9000 animal related nonprofit organizations.

[00:07:51.690] – Sean

Really smart play. Way to use the business, the power of the business to give back to the community. That’s smart. They did. However, there’s two cons here, which I totally agree with.

[00:08:03.360] – Sean

One is there are a lot of competitors, there’s a lot of ecommerce companies out there that serve the pet markets. And then they did state that given the economy, us as investors, we should pay attention to supply chain. So there’s companies out there that are supplying products for Chewy. Whether it’s consumable goods like pet food or toys, there might be impacts there. So just keep that in mind to call out some of the competition.

[00:08:31.960] – Sean

Of course you have petco. There’s a lot of private businesses in this space. Pet smart BarkBox. I mentioned earlier. Pet love, pet flow.

[00:08:40.420] – Sean

Phytotech. There’s a long list, most of which I’ve never heard of, but they’re popping up. It’s not a hard business to start. People can find products overseas. They can spin up shopping carts on shopify, let’s say.

[00:08:56.030] – Sean

And you’re off and running. Now, the big threat to pay attention to you is actually Amazon. So I did a little test. I picked a product on Chewy, just a bag of dog food. And I went to that exact same product on Amazon, the same price on Chewy as on Amazon and the same discount for autoship.

[00:09:15.660] – Sean

So what Amazon has done is they’ve mimicked the same model. So in this case, Chui can’t create a moat with autoship or the prices. There’s no moat there. Amazon is a strong powerhouse. They haven’t the infrastructure to do this.

[00:09:30.990] – Sean

So that’s a big threat. Keep that in mind if you’re interested or your investor in Chu. The products are going to be pretty close, if not dead, on the same price. This goes back to how do you create a moat? In this case, it’s the customer service.

[00:09:46.820] – Sean

And it’s not the most glamorous process because you can’t automate it. You have to have good people in the business. I really believe in your brand, but they need to lean into that great customer service. I say on the front end, when people are buying products, I think they can do a better job there. And then I really like to play that sympathy.

[00:10:04.800] – Sean

That empathy. When you lose a pet, follow up with people. Be there for them, because that’s going to encourage them to keep coming back. What I want to do a little bit here is talk about management. And then we’re going to do a quick overview of the forums.

[00:10:20.160] – Sean

So the current CEO sumit thing has been the CEO since 2018. His previous experience includes leadership roles for about five it looks like about five years at Amazon. He also worked at Dell, so he has really good experience with ecommerce, working in executive roles, helping grow global brands. I think that’s great. He understands supply chain, how to market, how to sell, how to really expand a business like this.

[00:10:50.930] – Sean

That’s good. The issue is, and this is something we’re doing more of with Tykr, is lean into glass door. Glass door is a great platform because you can really understand the truth behind the scenes. What are people saying? And their glass door rating is not impressive.

[00:11:06.780] – Sean

It’s a 3.4 out of five. We like to see a four point or higher. And then the CEO rating is actually a 60%. We like to see 80% or higher. I did skim through some of the glass door ratings.

[00:11:21.880] – Sean

I like to see what people are actually saying. And in most cases, when you see low ratings, you’re going to see a lot of issues with middle management. So there’s micromanagement. There are people being pushed to work longer hours. Maybe not the best pay.

[00:11:37.160] – Sean

A lot of condescension people being talked down to. That’s a big problem, because if you want to create that customer service that really believes in the brand and sharing the product and sharing their vision, giving back to nonprofits, if you really want to carry that through, it falls in customer service. And if I were leadership, I would place you’ve got your ecommerce systems in place, you’ve got great products, you’ve got great prices, you’ve got pet insurance taken off, you got a lot of stuff working. Well, I would place my emphasis heavily on customer service. How do we get people to stay with the company?

[00:12:16.980] – Sean

Because if you have lower glassdoor ratings that tell you what, you’re going to have high turnover and bringing people in quickly means you’re most likely running into a situation where people are just looking for a job. They want a paycheck, they want to punch in, get paid, punch out, they don’t really care about the customer. That’s not what you want. You want people that really believe in the Chewy brand and they are going over and above to do little things. If you can get an army of people doing little things for the customer, that’s what creates that stickiness and create that moat with the business.

[00:12:50.400] – Sean

So that’s at least what I would do with Chewy. So in this case, if you summarize the forums margin of safety, meaning looking really good, the issue was the moat, that competition. Amazon is the big threat there and then management. I think Singh can do a great job again optimizing the business to run very well. But let’s place a little higher emphasis on customer service.

[00:13:16.260] – Sean

Now in summary, what would I do in this bear market? There’s a lot of people talking about the brand. Shui is a good brand, they give back to nonprofits. Is this a long term hold? I would question that right now.

[00:13:28.850] – Sean

Although the share price is down like over 70% when the market starts taking off and we did take a look at the revenue and the net income and EPS moving in the right direction consistently, this stock will most likely generate returns when the market takes off. I can’t guarantee 100% but you’ll probably make some money. But if you do own the stock or you do want to get in, I would watch it closely. Like if something changes within Tykr, like it changes from over on sale to watch or overpriced, that might be a good time to sell. If you also see a threat here with Amazon and their revenues start to slow down, that might be another time to hey, I’ve made my profits, time to sell, move into another stock.

[00:14:17.820] – Sean

So just food for thought. Again, you’d probably make some money in the short term, but keep a close eye on this one for the long term unless they can totally transform that customer service department. So overall this is a stock that I’m going to add to my watch list. I just want to keep an eye on it, but I’m not going to invest in it. But if you do like the pet industry, you like Chewy, you like the brand, you like what they’re doing, this might be a stock to consider.

[00:14:43.480] – Sean

Hope you like the review. And if there’s a stock you want me to take a look at, please leave a comment. Below. I’ll get to work. We’ll talk soon.

[00:14:51.350] – Sean

See you. Bye. You can also check out our stock review on Cavco.