chewy

Shares of leading pet goods e-commerce juggernaut Chewy (CHWY -0.85%) are up 11% this week as of 1 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence.

Chewy reported earnings last Wednesday, Sept. 10, and immediately saw its shares drop after it offered up guidance that traders deemed was too conservative.

At that time, I argued that the sell-off seemed to be an overreaction and that the company’s underlying business looked stronger than ever. One week later, Chewy’s stock has bounced back on minimal news, so perhaps long-term investors have turned the tide against short-term traders selling due to 90 days’ worth of information.

Chewy: Building the strongest pet care ecosystem

The primary reason that I am confident in Chewy’s stock to succeed over the coming decades is the potential for its profit margins to rise. However, Chewy also offers numerous qualitative factors that make it an outstanding stock to consider, alongside its improving financials.

First off, Chewy ranked as the 29th top brand among millennials, according to Comparably. Landing at the No. 1 spot on Forrester’s Customer Experience Index, Chewy and its willingness to go above and beyond for its customers and their furry friends shine through.

Image source: Getty Images.

This customer satisfaction creates an immensely loyal base of patrons to build an ecosystem around.

Home to the Chewy+ membership program, 12 Chewy Vet Care clinics, a heavily used autoship offering, the most pet pharmaceutical sales in the U.S., and a growing list of private label products, the company has quickly become a one-stop shop for pets.

Trading at 30 times forward earnings, Chewy’s rising margins, budding ecosystem, and 10% annualized growth rate over the last three years look attractively valued.

Despite its stock price already doubling since 2024, leading online pet goods retailer Chewy (CHWY 0.05%) remains one of my favorite stocks to buy right now.

One particular reason stands out to me as to why Chewy stock is worth owning, and that is the potential for its profit margins to keep rising.

Since the company’s focused on an array of higher-margin growth areas, Chewy’s profitability could continue improving — and investors should be very excited about it.

Chewy’s burgeoning profit margins

Over the past two years, Chewy has become consistently profitable and cash-generative.

However, despite already recording a 2% net profit margin and a 4% free cash flow (FCF) margin (1.2% if you include stock-based compensation), the company’s margins could keep rising as management focuses on the following higher-margin areas.

Autoship

Chewy’s Autoship subscription plans account for 83% of total sales. This large base of Autoship sales means that most of Chewy’s revenue is predictable, steady, and ripe for further streamlining.

Image source: Getty Images.

Chewy Vet Care

The company plans to have 20 Chewy Vet Care clinics running by year’s end. These clinics give the company a physical presence and also offer the higher margins that veterinary shops typically achieve.

Get Real

Chewy recently launched its own private-label healthy and fresh dog food, Get Real. This premium-priced product offers higher margins (particularly as a private label good) and ties in perfectly with Chewy’s Autoship subscriptions.

Advertising

Chewy’s sponsored ads business remains a major driver of the company’s growing profitability. Management believes that these high-margin placements should one day grow to account for between 1% and 3% of total revenue.

Chewy+

The company’s new $49 annual membership program, Chewy+, received a positive reaction following its launch. Chewy+ provides members with free shipping, 5% rewards on purchases, and exclusive offers. Chewy+ members already accounted for 3% of the company’s June sales, and the program could generate substantial high-margin membership fees annually.

Trading at 29 times forward earnings — but with these earnings potentially set to rise — Chewy is a top stock to consider today.