If You're Looking for a Good Reason to Buy Chewy Stock, This Is It

If you were looking for a reason to not buy shares of pet e-commerce company Chewy (NYSE: CHWY), then its lack of customer growth in recent years was a pretty good one. It overshadowed many otherwise good things happening at the company.

To be clear, there's been plenty of good with Chewy. In 2024, the company had net sales of $11.9 billion. But the impressive stat here is that net sales per active customer continue to grow. As of the fourth quarter of 2024, it had annual sales of $578 per active customer, on average. For perspective, this number was only $495 in the same quarter two years ago.

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Not only are sales per customer encouragingly trending higher and higher, Chewy's profit margins are also improving. In 2020, the company opened its first fulfillment center with automation capabilities, and it's continued to open more automated centers in the years since. The end result is that Chewy's gross margin has improved by over 20% since then and is now at an all-time high.

CHWY Gross Profit Margin data by YCharts.

These improved profit margins have translated to real profits for Chewy as well. The company generated positive free cash flow in 2021, and it's grown steadily since. In 2024, its free cash flow swelled to $452 million, which isn't bad for a company that's only valued at $13 billion.

Chewy is using its surging profits not only to reinvest in the business, but also to reward shareholders. In 2024, the company bought back stock for the first time, ultimately spending more than $900 million repurchasing shares to boost shareholder value.

Sales growth, margin enhancement, profits, and shareholder-friendly moves have all been positive developments for Chewy in recent years. Nevertheless, a declining overall customer count could have been a deal-breaker for some investors. That's why it's significant to note that Chewy is growing its customer count again.

Why customer growth is a big deal

At the end of 2021, Chewy had 20.7 million active customers using its e-commerce platform. The potential for growing this business is sky-high. After all, roughly 90 million U.S. households have a pet, and Chewy is the leading e-commerce platform for pet food and toys. Further growing its customer count seemed inevitable.

But it wasn't. The 20.7 million active Chewy customers at the end of 2021 proved to be the high water mark. The company's active customer count has decreased steadily on a year-over-year basis in the quarterly reports since then. These languishing results juxtaposed against such an apparently long runway were a good reason to view Chewy stock with skepticism.

However, the tide started to turn in the third quarter of 2024 -- Chewy's customer count increased from the previous quarter. Then, in Q4, the trend picked up momentum, and the company added over 400,000 new customers compared to the fourth quarter of 2023.

When active customers spend more money, it's a good thing. But Chewy's growth potential is limited if this is its only source of sales growth. In contrast, the number of households not using Chewy's services represents an enormous opportunity. As the industry leader, one would expect smooth sailing in this area, which is why its struggles were a red flag. But with two quarters of positive momentum again, the outlook for Chewy appears to be improving.

Is Chewy stock a buy?

Here are some important things to consider about Chewy stock. Its financial metrics are trending in the right direction, now including its customer count as well. Moreover, the company has a rock solid balance sheet with no debt and nearly $600 million in cash and short-term investments.

Chewy stock also trades at a reasonable valuation at just 1 times sales. Assuming it can continue to grow long-term and that profit margins continue to improve, even just modestly, this valuation offers a compelling entry point.

These two points alone -- its financial metrics and its valuation -- are enough to make Chewy stock a cautious buy. But its return to customer growth makes it a no-brainer buy in my view. The company has a large opportunity ahead of it, and after a couple of years of stumbling, it's bouncing back by attracting new customers. If you were looking for a good reason to buy Chewy stock, this is it.

As long as this continues, I imagine that Chewy stock will be a rewarding investment.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.