Tender shareholders are in for a treat, even in a potential bear market

Softit is (CHWY -1.30%) the stock price is down 75% since hitting an all-time high of $120 in early 2021. As this performance suggests, investor expectations were very low when the earnings report was released of the first fiscal quarter on June 1. After the company showed sales grew 14% year-on-year with improved profitability from the prior quarter, the stock jumped 24%.

Value investors are looking for heavily discounted stocks during this market correction, names that can rebound from their lows and potentially generate big returns. Digging into Chewy’s business model, the company appears to be significantly undervalued at the moment.

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Chewy can survive a bear market

Pet owners are going to spend on their pets no matter what. This is a key distinguishing feature between Chewy and other e-commerce stocks. If the economy deteriorates and people are unwilling to spend money, some e-commerce businesses that sell clothes or electronics, for example, may experience sales pressure. But pet owners will still need to purchase pet food, medicine, and other necessities to care for their four-legged family members.

Chewy is a relatively safe company to invest in during a bear market. It is the largest pure pet e-commerce store in the United States. It also ended the last quarter in strong financial shape with $604 million in cash on the balance sheet and no debt.

The most telling sign of Chewy’s rock-solid business model is the percentage of sales coming from its Autoship program. This is a popular feature that allows customers to have products automatically shipped to their doorstep on a set schedule. In the first fiscal quarter, Autoship accounted for 72.2% of customer sales, compared to 69.3% in the prior year quarter and 65.7% in fiscal 2019 (which ended in January) .

Autoship sales reported include sales made by any customer who participated in the program within the past year. This means that Autoship sales also include orders placed by customers outside of their subscriptions, so it’s a good metric for tracking how much of Chewy’s business is generated by its most frequent customers. Building on Autoship’s rising sales, Chewy said net sales per active customer rose 15% year-over-year to a record $446.

Chewy clearly has a very loyal customer base that continues to spend more with the company over time. This is important to understand, as most of his clientele was acquired within the last three years. This represents huge potential for sales growth over the next few years, as you will see in the next section.

A powerful combination of growth drivers

Chewy ended the quarter with 20.6 million active customers, which is defined as a customer who purchased a product or service in the past 364 days. Specifically, two-thirds of these customers were acquired within the last three years. This provides good visibility into future sales growth when considering the spending habits of older customer cohorts.

In the first year of buying with Chewy for the first time, the average customer spends less than $200. In year two, it jumps to over $400, and in year five, customers spend around $700. Chewy says his oldest cohorts spend nearly $1,000 a year.

Some customers may come to Chewy for the convenience of Autoship, but as they become satisfied with the service, they might think of Chewy first the next time they need to purchase a new dog bed.

Eventually, these customers may want to try Chewy’s health services, including the upcoming rollout of pet wellness and insurance plans. This is the powerful effect of Chewy’s business model. It is growing through the acquisition of new customers, in addition to seeing substantial growth in sales from existing ones. Each new service it launches strengthens its growth potential and expands its addressable market.

That’s not reflected in the stock price at those lows, but Chewy’s business is going up in value. What is certain is that the growth in net sales and spending per customer will make Chewy’s business worth much more in the future. That’s why Chewy is a promising e-commerce stock to buy during this market downturn.

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