October 01, 2021 - 7:52am EST by
2021 2022
Price: 68.00 EPS 0 0
Shares Out. (in M): 417 P/E 0 0
Market Cap (in $M): 29,000 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 28,340 TEV/EBIT 0 0

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I believe that a pure-play online pet and pet health retailer with no legacy physical retail business, an increasingly scaled and sophisticated logistics network, a growing base of loyal and happy customers (+20mm), and brand that has earned trust and affection in a category where those attributes matter, is going to be a durable and increasingly valuable business. Online pet retail is a durable market that can grow market share for 20 years, there is immense latent optionality on new technologies improving the quality of the online experience in a non-linear way through better recommendations and personalization, and there is growing platform optionality on scale and depth in new high-margin health services and private label categories. The category overall is economically resilient, highly strategic to all mass market retailers, and has strong demographic and psychographic growth tailwinds through more pet ownership, higher spend per pet, and more pet shopping online.  Buying pure-play online retailers at low multiple of sales (~3x E2022) when there could be ten years of sales can grow at or near 20% annualized while the sales mix is shifting to higher-margin revenue streams is attractive.


 Chewy can compound sales growth and earnings power at between 15-20% annualized for the next 10 years, which should approximate the annualized return in the stock. Cash earnings can far exceed estimates due to growing health services and private label increasing share of revenue as well as positive working capital benefit. By 2025, Chewy could generate $30B in sales, $3B in EBIT, $2B in cash earnings and be valued at $50B (60% upside). Longer-term, the business can grow market value in excess of $50B by expanding internationally, becoming dominant in online pet health, and/or eventually growing private label to 30-40% of sales. I don’t know which will happen, but they are all possible.


 The downside should be relatively protected given the built-in base of recurring autoship customers, the strategic value of pet due to some of the largest CPG companies (Mars/Nestle) and retailer (Amazon/Walmart) in the world. Acquiring Chewy would be a once in a generation opportunity for a CPG company to establish a direct relationship with customers (a market position that they will not build organically), or a once-in-a-generation opportunity for a large physical retailer (Walmart/Costco/Target) to own a category of online retailer that drives consistent traffic and has strong structural growth drivers.  


People love their pets; for many people, pets are family. Some people view pets like children. And for many, how they treat their pet, including what food and toys they provide, reflects the quality of their pet parenting, and by extension, their sense-of-self. This is a relatively new psychological phenomenon that has slowly, but surely, manifest as new generations of pet owners reconsider and redefine their relationships to their pets. People are staying single longer—and getting pets. Married couples are having children later and getting pets. People are posting pictures of their pets on social media and dressing up their pet for holidays. These customer behavior changes have profound implications on the business of selling pet products. Any analysis of the pet industry and the companies within it is incomplete if not placed in the proper social and cultural context that characterize modern conceptions of pet ownership. The subjective experience and relationship that each pet owner has to their pet invariably informs the analysis of any business that seeks to satisfy the needs, wants, and desires of customers in this space.


 The human-pet relationship with a pet is unique in another way; pets cannot communicate directly with owners to let them know how they feel or what they like (they signal through behavior).  This creates a particular set of challenges in shopping for products and services for pets for many people. The strong emotional connection that many consumers have to their pet combined with the information gap regarding what pet products and services might be best for a particular pet support the market position of pure-play online pet retailer solely focused on the pet category committed to the best customer experience for pet owners. That is Chewy. 10% of the customer service calls that Chewy receives are for pet care advice. Chewy has the best customer service in the pet space.


            Low prices and convenience (as determined by selection and shipping speed) are perennial drivers of market share in most categories, including pet. Amazon will continue to do well here. Chewy should remain competitive on price and selection. But, for some base of customers, there are intangibles considerations that will matter beyond just price and selection. What are the best products for a new puppy in a certain breed? What style of cat bed is more durable? What platform has the best selection of Halloween costumes for my French bulldog? Should my pet change diet at a certain age? There are countless other questions and purchase use cases that shape consumer psychology in the pet category and establish a large market opportunity for the retailer that is best suited to satisfy the multitude of consumer needs and desires related to this category of retail—with its focus, brand, and growing platform depth and breadth (in terms of product and service offerings), Chewy is best positioned to win consumer consideration and dollars related to the consumer needs above, as well as many others.


            I take a bit of an extreme view of related to what is needed to establish and defend a dominant and highly profitable online retailer that can be worth $100B+ (just a shorthand proxy for the value a scaled online retailer could achieve over the next ten-twenty year). In the physical world, the quality of the customer experience was largely determined by the real estate (how close was the store to the customer) selection (did the store have what I need) and price (were the prices competitive). A great customer experience was often shaped by store cleanliness, employee friendliness, and certain physical properties (aisle width/lighting/ambiance).  Anchored in physical real estate locations, and limited by the physical shelf space, there was limited room to improve the customer experience. Incredible and highly defensible retail franchises have been built and sustained on optimizing one or more of there categories. Walmart, Costco, Home Depot and Target, to name just a few, built incredible businesses optimizing for one or more of these retail fundamentals. And in the case of Target/Costco, each leveraged its brand and market position and loyal customer base into highly profitable private label businesses, one of the true prizes of retail dominance given the margins.


            But compared to online retail, physical retail is relatively constrained in its capacity to improve. There are a lot of ways to define improvement, but a few core categories of improvement are faster, more reliable and more accurate shipping (and developing the supply chain and logistics capabilities required to that) and more personalized, intuitive and user-friendly front-end digital shopping experience across


            I think we are in the first inning in terms of the quality of the online shopping experience. The internet has already established supremacy as the shopping channel that offers the best price and selection (easy to compare price/more selection online). Immediacy, as measured by delivery speed, will eventually reach parity with physical (i.e., the time it takes to park/find the item; pay and check-out---the customer will have been able to order and receive online).


             The next frontier will be the capacity of the online retailer to better personalize and recommend products through more helpful and vivid merchandising. Not only will the platform consider purchase history, price point preference, and location, eventually the online platform will be able to merchandise and recommend products based on context—what dog harness might be better for a customer over the age of 60 with a large dog; what dog vest is more durable in snow for a customer in Wisconsin that is entering the winter months. When the purchase is framed in these contexts, it has implications for what image, description, and video the retailer should present to what customer. This will probably eventually require capabilities in AI and machine learning to interpret, process and respond to large volume of data—but to move in this direction, the business must have scale and focus and logistics infrastructure. Chewy is the only company in the pet category in the US that has each. A great online retailer is going to help a customer make a better decision—and when it comes to pets, there is a lot of value in that capability. If one views a great retailer as a service provider, one of the highest value services that the retailer can deliver is to help the customer make the best purchase for their needs. In the pet category, Chewy is best suited to achieve this market position over the next twenty years.
























I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


higher revenue and profit contribution from health and private label

expansion internationally in an economical manner

fortify position as leading online pet healh and wellness service provider

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