As CHWY Surges, the Value Story Disintegrates

Chewy Inc.’s stock price has surged to a price of $40.05 today. Ending the day with a 6.7% increase, CHWY shares outperformed the S&P500 and Dow Industrial composite indices by 6.5% and 6.9% respectively, but are still well below their 52 week high of $54.19. Over the last 12 months, Chewy is down 24.8%, and has underperformed the S&P 500 by 8.2%. Now, the large-cap Consumer Cyclical company is 15.36% below its average target price of $47.32 and has an average analyst rating of buy.

Chewy does not release its trailing 12 month price to earnings (P/E) ratio since its earnings per share of $-0.23 are negative over the last year. Based on the company's positive earnings guidance of $0.11, the stock has a forward P/E ratio of 364.1. The P/E ratio tells us how much investors are willing to pay for each dollar of the company's net earnings from its sales operations. By way of comparison, the average P/E ratio of the Consumer Cyclical sector is 24.11, but a company's price can remain stable for a long time even if it is over or undervalued.

Company accountants calculate earnings by subtracting the costs of sales and overhead from its revenues. These metrics focus on the sales side of the company only -- it's important to remember that companies can have many other costs and sources of income that are independent from its core business. For example, a company may have extensive expenses such as rent and debt servicing, and on the other hand it may receive additional income from its investments and intellectual property.

So the earnings picture only shows a slice of the company's financial health. They also don’t represent actual inflows of cash, since revenues are calculated on the basis of product or service deliveries, as opposed to actual payments received. The importance of earnings is that they enable us to analyze the company’s growth and profitability over time.

Here is an overview of Chewy’s operating margins, which are the percentage of net profit compared to total revenues:

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-01-31 8,891 2,446 -0.81 36.22
2021-01-31 7,146 1,911 -1.27 75.62
2020-01-31 4,847 1,397 -5.21 31.27
2019-01-31 3,533 983 -7.58 n/a
  • Average operating margins: -3.7 %
  • Average operating margins growth rate: 47.7 %
  • Coefficient of variability (the lower the better): 87.3 %

Let’s contrast the operating margins with an overview of Chewy’s gross margins, which only take into account expenses directly related to producing revenue (i.e. without overhead):

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-01-31 8,891 6,517 26.7 4.79
2021-01-31 7,146 5,325 25.48 7.97
2020-01-31 4,847 3,703 23.6 16.66
2019-01-31 3,533 2,818 20.23 n/a
  • Average gross margins: 24.0 %
  • Average gross margins growth rate: 9.8 %
  • Coefficient of variability (the lower the better): 11.7 %

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it were liquidated today (i.e. selling all assets and paying off all debts). Chewy's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 103.0, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11.

Since it has a a negative P/E ratio, an elevated P/B ratio, a pattern of improving cash flows, and negative and irregular operating margins, Chewy is probably overvalued at current prices. Make sure to complement this brief quantitative review with a qualitative analysis of your own!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.