Chewy (CHWY)

E-commerce pet food and supplies retailer Chewy (NYSE:CHWY) announced better-than-expected revenue in Q4 CY2024, with sales up 14.9% year on year to $3.25 billion. Its non-GAAP profit of $0.28 per share was 36.6% above analysts’ consensus estimates.

Company Overview

Founded by Ryan Cohen, who later became known for his involvement in GameStop, Chewy (NYSE:CHWY) is an online retailer specializing in pet food, supplies, and healthcare services.

Consumers ever rising demand for convenience, selection, and speed are secular engines underpinning ecommerce adoption. For years prior to Covid, ecommerce penetration as a percentage of overall retail would grow 1-2% annually, but in 2020 adoption accelerated by 5%, reaching 25%, as increased emphasis on convenience drove consumers to structurally buy more online. The surge in buying caused many online retailers to rapidly grow their logistics infrastructures, preparing them for further growth in the years ahead as consumer shopping habits continue to shift online.

Chewy competes with Amazon (NASDAQ:AMZN), Petco (NASDAQ:WOOF), BARK (NYSE:BARK), PetMed Express (NASDAQ:PETS), Walmart (NYSE:WMT), and Costco (NYSE:COST).

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Chewy’s 9.8% annualized revenue growth over the last three years was mediocre. This fell short of our benchmark for the consumer internet sector and is a rough starting point for our analysis.

This quarter, Chewy reported year-on-year revenue growth of 14.9%, and its $3.25 billion of revenue exceeded Wall Street’s estimates by 1.5%.

Looking ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

For online retail (separate from online marketplaces) businesses like Chewy, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.

Chewy’s unit economics are far below other consumer internet companies because it must carry inventories as an online retailer. This means it has relatively higher capital intensity than a pure software business like Meta or Airbnb and signals it operates in a competitive market. As you can see below, it averaged a 28.7% gross margin over the last two years. That means Chewy paid its providers a lot of money ($71.26 for every $100 in revenue) to run its business.

Chewy’s gross profit margin came in at 28.5% this quarter, in line with the same quarter last year. On a wider time horizon, Chewy’s full-year margin has been trending up over the past 12 months, increasing by 1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view of the business’s profit potential.

Chewy has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer internet business, producing an average EBITDA margin of 4.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Chewy’s EBITDA margin rose by 3.9 percentage points over the last few years, as its sales growth gave it operating leverage.

This quarter, Chewy generated an EBITDA profit margin of 3.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Chewy’s EPS grew at an astounding 208% compounded annual growth rate over the last three years, higher than its 9.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Chewy’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Chewy’s EBITDA margin was flat this quarter but expanded by 3.9 percentage points over the last three years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Chewy reported EPS at $0.28, up from $0.18 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Chewy’s full-year EPS of $1.03 to grow 18.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Chewy has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.5%, subpar for a consumer internet business.

Taking a step back, an encouraging sign is that Chewy’s margin expanded by 3.7 percentage points over the last few years. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Chewy’s free cash flow clocked in at $156.6 million in Q4, equivalent to a 4.8% margin. This result was good as its margin was 2.4 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Chewy is a profitable, well-capitalized company with $596.7 million of cash and $502.4 million of debt on its balance sheet. This $94.26 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Chewy beat analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 4.4% to $35 immediately after reporting.

Updated: May 21, 2025 at 10:27 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Chewy.

Chewy’s business quality ultimately falls short of our standards. To kick things off, its revenue growth was mediocre over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its EPS growth over the last three years has been fantastic, the downside is its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses. On top of that, its low free cash flow margins give it little breathing room.

Chewy’s EV/EBITDA ratio based on the next 12 months is 27.5x. This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $39.58 on the company (compared to the current share price of $43.30), implying they don’t see much short-term potential in Chewy.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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