Chewy Stock Keeps Beating the Stock Market. Time to Buy?

Online pet retailer Chewy (NYSE: CHWY) has significantly outperformed the market, with shares up over 21% year-to-date, on the back of strong Q1 FY25 results including an 8% sales increase to $3.1 billion and over $192 million in adjusted EBITDA. The company maintains a robust balance sheet with $616 million in cash and no debt, and is actively repurchasing shares. Strategic initiatives like its high-retention AutoShip service (82% of sales), new sponsored ad revenue, and the expansion into veterinary clinics are driving growth and margin expansion towards a long-term adjusted EBITDA goal of 10%, despite ongoing competition.

Analysis

Chewy (CHWY) is demonstrating strong fundamental performance and strategic execution, leading to significant market outperformance with its stock advancing over 21% year-to-date, compared to the S&P 500's 9.6%. The company's fiscal 2025 first-quarter results underscore this momentum, with an 8% increase in sales to $3.1 billion, surpassing its own guidance. Profitability is also improving, evidenced by adjusted EBITDA growing to over $192 million, a year-over-year increase of $29.8 million. Key to its operational strength is a robust balance sheet featuring $616 million in cash and no debt, which supports strategic initiatives like its recent $23 million share repurchase. Growth is being fueled by a multi-pronged strategy. The high-retention AutoShip service, which constitutes 82% of net sales, provides exceptional revenue visibility. Furthermore, new revenue streams are proving effective, with sponsored ads cited as the primary driver of gross margin gains in the quarter. The recent expansion into opening physical veterinary clinics represents a long-term play to broaden the ecosystem and capture new customers. These efforts are part of a clear path toward the company's long-term goal of a 10% adjusted EBITDA margin, a significant expansion from the 6.2% reported in the recent quarter. While the stock trades at 32x forward earnings, the primary risks involve the execution and pace of the capital-intensive vet clinic rollout and sustained competition from low-price leaders like Walmart and Amazon.

Key Decisions for Investors

• Given the strong top-line growth, debt-free balance sheet, and clear drivers for margin expansion, investors may consider the current valuation at 32x forward earnings a reasonable price for a long-term holding.
• Monitor the progress of the sponsored ads and veterinary clinic initiatives, as their successful execution is critical for Chewy to achieve its stated long-term adjusted EBITDA margin target of 10%.
• Investors should track customer retention and AutoShip sales percentages as key indicators of competitive resilience against price-focused retailers like Amazon and Walmart, which represent the primary risk to the thesis.