Chewy: Riding the Wave of Pet Industry Growth

Chewy is a leading online retailer of pet products and services in the United States, offering everything from pet food and toys to medications, insurance, and veterinary care. Built on a foundation of customer service, convenience, and recurring revenue through programs like Autoship and Chewy+, the company has steadily expanded its reach into pet healthcare while deepening engagement across its digital ecosystem. As pet humanization and ecommerce adoption continue to reshape the industry, Chewy is aiming to become a one-stop destination for modern pet parents. The question is: Does this ecommerce trailblazer earn a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Chewy at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Chewy, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Chewy is the leading pure-play online retailer in the U.S. focused on pet food, supplies, pharmacy, and services. Launched in 2011, it serves over 20 million active customers and offers a selection of around 130.000 products, including third-party brands, private labels, and prescription medications. The majority of its revenue comes from nondiscretionary consumables like food and treats, which serve as a stable base. Chewy also operates the largest online pet pharmacy in the U.S. and is expanding into high-margin services such as telehealth, insurance plans, and in-person veterinary clinics under the Chewy Vet Care brand. These additions deepen its presence in pet healthcare, a fast-growing vertical with significant potential. A core strength of Chewy's business model is its Autoship subscription program, which now accounts for 80% of revenue. This creates recurring, predictable demand and high customer retention. The program reduces friction for pet parents while embedding Chewy as the default provider for essential pet needs. Chewy’s competitive moat is rooted in its customer service culture, recurring revenue model, healthcare integration, fulfillment scale, and technology platform. Its U.S.-based customer service team is trained extensively and empowered to deliver highly personalized experiences that build emotional loyalty and word-of-mouth growth. The scale of its fulfillment network enables next-day or two-day delivery to nearly the entire U.S. population, supporting both convenience and cost efficiency. Its healthcare offerings, from online pharmacy to telehealth and vet clinics, are difficult to replicate and drive higher margins. Proprietary tools like Pet Profiles and PracticeHub further personalize the experience and increase switching costs. Pet Profiles allow customers to store detailed information about their pets—such as breed, age, health needs, and preferences, which Chewy uses to offer tailored recommendations and reminders. PracticeHub is a platform for veterinarians that integrates their practice management systems with Chewy’s fulfillment and customer service capabilities, enabling seamless prescription ordering and client communication. Chewy has positioned itself as the most trusted and convenient destination for pet parents, blending the heart of a local pet store with the speed and reach of e-commerce.

Management

Sumit Singh serves as the CEO of Chewy, a role he assumed in 2018 after initially joining the company as COO in 2017. He brings a strong background in e-commerce and operations, having held senior leadership positions at Amazon and Dell prior to joining Chewy. His experience spans areas such as supply chain optimization, customer experience, and technology-enabled growth. Sumit Singh holds a master’s degree in engineering from the University of Texas and an MBA from the University of Chicago Booth School of Business. Under his leadership, Chewy has undergone a period of significant transformation and growth. Since taking over as CEO, the company has more than tripled its revenue and expanded into new verticals such as pet healthcare, insurance, and in-person veterinary services. He also led the company through its successful IPO in 2019 and has focused on building a high-performing, customer-obsessed culture. Sumit Singh’s leadership has earned widespread recognition. In 2020, he was named to the Bloomberg 50, a list honoring innovators and leaders shaping global business. That same year, he was also included in Comparably’s list of Best CEOs. Beyond his role at Chewy, he serves on the Board of Directors at Booking Holdings. Chewy has received multiple accolades during his tenure, including being named a “Best Place to Work” by Built In in 2022 and consistently ranking among “America’s Best Customer Service” providers by Newsweek. With a track record of execution, innovation, and customer focus, Sumit Singh is well-positioned to guide Chewy through its next phase of growth as the company continues to broaden its offerings and strengthen customer loyalty.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Chewy made its IPO in June 2019, so we don't have data prior to fiscal 2020. Chewy’s fiscal year runs from February to the end of January the following year, which means that the numbers from fiscal 2020 do not cover a full year. Chewy's ROIC has been a bit erratic over the past six years, and there are several reasons for that. First, for several years Chewy was not making a profit. Since ROIC is based on profits, losses will automatically drag the number down, even if the business is growing and improving operationally. Second, as a newer company, Chewy didn’t have much money invested in the business early on. That means even small profits or losses could cause the ROIC to swing wildly. For example, a small profit on a small investment can make the ROIC percentage look unusually high, while a small loss can make it look extremely low. Lastly, Chewy leases a lot of warehouse space. Changes in accounting rules around leases can affect how invested capital is reported, which can distort the ROIC further, without reflecting any real change in how the business is performing. Chewy only recently began generating consistent positive free cash flow, and the business model is now maturing into one with steadier economics. For this reason, it's more meaningful to focus on the past three years, during which Chewy achieved a ROIC above 10% in two of them. Chewy’s ROIC improved in fiscal year 2025 mainly because the company became more profitable, managed its capital more effectively, and ran its operations more efficiently. Given these improvements, I expect the company to continue delivering ROIC above 10% in the years ahead.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Chewy's equity turned positive starting in fiscal year 2022, primarily because the company became profitable for the first time. That year, Chewy reported a positive net income, a significant improvement from earlier years of net losses. This profit helped increase retained earnings, which, along with other factors, shifted the company’s total equity from negative to positive. Chewy continued to grow its equity each year until fiscal year 2025, when equity decreased despite the company earning a solid profit. This might seem surprising at first, but it was mainly due to changes in how much value was recorded from stock-based compensation and from share repurchases. In simpler terms, while the company was doing well and cutting down past losses, it also reduced the amount of investor capital on its books - so overall equity went down. This combination led to a drop in equity even though the underlying business was stronger. For that reason, the decline in equity in fiscal year 2025 is not a concern.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is encouraging that Chewy has maintained positive free cash flow for the past five years, with only one year of negative free cash flow since its IPO. Another positive sign is that Chewy has increased its free cash flow every year since going public. In fiscal year 2025, the company reached its highest free cash flow and levered free cash flow margin to date. There are several reasons for this. First, the company has become more profitable. It's earning more money because it’s running its operations more efficiently and keeping costs under control. Second, Chewy has improved how it manages inventory - ordering and storing products more wisely - and it has reduced spending on large investments like warehouses and equipment. This allows the company to keep more cash on hand. Finally, Chewy has been growing the parts of its business that are more profitable, such as pet health services and its private-label products. These areas generate more income with lower costs, which helps boost cash flow even further. As Chewy grows its free cash flow, investors can reasonably expect the company to return more value to shareholders. Until fiscal year 2025, Chewy had been increasing its share count every year. But in fiscal year 2025, it launched its first share repurchase program, which led to a decline in the number of shares outstanding for the first time since the IPO. The company still has most of its $500 million repurchase authorization remaining. The free cash flow yield suggests that the shares are currently trading at a premium valuation. However, we will revisit valuation later in the analysis.

Another important aspect to consider is the level of debt. It’s crucial to determine whether a business has manageable debt that could realistically be repaid within a three-year period. This is typically calculated by dividing total long-term debt by earnings. However, in Chewy’s case, it's not possible to calculate this ratio because the company has no debt. Chewy hasn’t carried any debt since its IPO, which I see as a healthy sign and a reminder that debt is unlikely to become an issue going forward.

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Risks

Competition is a major risk for Chewy because the pet products and services industry is both crowded and constantly evolving. Chewy isn’t just competing with other online pet stores - it’s up against a wide range of retailers, including big players like Amazon, Walmart, and Petco, as well as supermarkets, warehouse clubs, dollar stores, drugstores, and even veterinarians. Some of these companies are much larger than Chewy and have more resources, stronger brand recognition, longer operating histories, and bigger customer bases. These advantages allow competitors to offer lower prices, spend more on marketing, and adapt more quickly to changing consumer habits. In particular, the shift from in-store shopping to online has led to fierce competition in e-commerce. Many of Chewy’s competitors also have physical stores, giving them an “omnichannel” advantage - meaning they can serve customers both online and offline, often with same-day pickup or delivery options. Another risk is that pet owners might be tempted to switch retailers based on price. With online shopping, it’s easy to compare prices across websites in real time, which weakens Chewy’s ability to raise prices or maintain margins. This is especially important in tough economic times, when customers are more likely to look for cheaper alternatives - Walmart, for example, has gained market share by appealing to value-focused shoppers. Chewy also faces direct competition in pet healthcare. Veterinarians can sell medications during in-office visits, which many pet owners find convenient. Other online and traditional pet pharmacies may have advantages like lower costs, more established brands, or better deals with suppliers.

Reliance on third-party suppliers is a meaningful risk for Chewy because the company does not manufacture the products it sells instead, it depends on a network of suppliers to provide everything from premium pet food to accessories and healthcare items. If any of these suppliers run into issues, Chewy’s ability to serve customers can be disrupted. Some of Chewy’s key suppliers have limited production capacity, meaning they may not be able to keep up if Chewy’s demand grows rapidly. In the past, Chewy has already faced delays and cost challenges when suppliers couldn’t deliver products on time or at the agreed prices. While those issues were temporary, they highlight a vulnerability that could reappear, especially during periods of supply chain stress or sudden demand surges. In addition, if a major supplier decides to stop selling to Chewy or to end special pricing or marketing incentives, it could hurt Chewy’s margins and limit the variety of products it offers. That matters particularly in categories like pet food, where brand loyalty is strong and customers are often hesitant to switch. If Chewy loses access to a popular brand, it could lose customers along with it. There’s also a competitive risk: if one or more of Chewy’s suppliers start selling directly to supermarkets, warehouse clubs, or discount retailers - or offer better pricing or promotional support to Chewy’s competitors - then Chewy could lose both pricing power and customer appeal. This would put downward pressure on sales and margins. Lastly, if Chewy can’t secure new supplier relationships quickly enough to replace any lost ones, its product selection could shrink, making the platform less attractive to shoppers and weakening its competitive position.

Customer growth saturation is a key risk for Chewy because its long-term success depends heavily on acquiring new customers and keeping them engaged. Management has already acknowledged that its recent growth rates may not be sustainable, which raises concerns about whether Chewy can continue expanding its customer base at the pace it needs to support future sales and profitability. Chewy faces several challenges here. First, much of the low-hanging fruit has already been picked. Many pet owners who are willing to shop online may already be Chewy customers, meaning future growth will require winning over more reluctant or brand-loyal shoppers - those who currently buy from physical stores, competitor websites, or even directly from suppliers. Acquiring these customers can be much harder and more expensive. Second, the company spends heavily on marketing to attract new users, through paid ads on search engines and social media, as well as traditional media like TV and magazines. But the cost of these channels is rising, and the effectiveness of digital advertising is becoming harder to maintain, especially with frequent changes in algorithms and growing competition for online visibility. If Chewy can’t keep acquiring customers at a reasonable cost, its profit margins could come under pressure. There’s also a risk that existing customers don’t buy enough to justify the cost of bringing them in. If new customers place one or two orders and then leave, Chewy won’t earn back what it spent to acquire them. This would hurt profitability and make growth less efficient. Another factor is customer engagement. Even after someone becomes a customer, Chewy must keep them active - buying regularly, signing up for Autoship, and trying out new products or services. If repeat purchases or spending per customer stagnate, Chewy’s growth could slow even if the total number of customers rises modestly.

Reasons to invest

Trends in the pet industry offer a compelling reason to invest in Chewy because they create strong, long-term tailwinds that align closely with the company’s strengths. One of the most important trends is “pet humanization - the idea that pet owners increasingly view their animals as family members. This emotional bond is driving people to spend more on their pets, not just on basics like food, but also on premium products, healthcare, and services aimed at improving pets’ health and well-being. Research shows that most U.S. pet owners consider their pets to be part of the family, and a large majority are willing to pay extra for products with added health benefits. This shift supports Chewy’s expanding focus on premium offerings, such as specialty foods, telehealth, insurance, and in-clinic care. Another reason this trend matters is the resilience of pet spending. Even during economic downturns, pet owners tend to keep spending on their pets at consistent levels. For example, while other categories like food and apparel saw declines during the 2008–2010 recession, spending on pets actually increased. Similarly, during the COVID-19 pandemic, pet adoptions surged, and pet care spending remained strong. This consistency makes the pet industry one of the most defensive sectors - and gives Chewy a relatively stable revenue base even in uncertain macroeconomic conditions. A third major trend is the ongoing shift to online shopping, which benefits Chewy as a pure-play e-commerce platform. The percentage of pet product sales made online has grown rapidly from around 20% in 2018 to nearly 38% in 2024 and is expected to rise further as more consumers choose the convenience of home delivery. Management estimates that Chewy is capturing 40 to 50 cents of every new dollar spent online in the category, indicating it’s gaining share as the market grows.

Expanding into pet healthcare is a compelling reason to invest in Chewy because it opens up a large and high-margin market that remains relatively untapped. This opportunity fits well with the company’s strengths in convenience, trust, and digital infrastructure. The U.S. veterinary services market is estimated to be worth around $25 billion, which is almost one third the size of the pet supplies market, yet it remains highly fragmented, with many small, independent clinics and limited digital integration. Chewy is aiming to bring scale, technology, and a customer-focused experience to this space, much like it has done in pet e-commerce. This creates a new revenue stream while also deepening customer loyalty across its ecosystem. Chewy has already made significant progress in this area. It operates the largest online pet pharmacy in the U.S., offering prescription medications, customized compound drugs, and over-the-counter health products. Its “Connect with a Vet” telehealth service, launched in 2020, now offers broad access to veterinary support, bringing medical advice directly to pet owners with convenience and speed. Beyond digital services, Chewy is building a physical presence through Chewy Vet Care clinics. It opened eight clinics in 2024 and plans to add more in 2025. Early results have been encouraging: the clinics are outperforming expectations in both usage and customer engagement. Management has noted that these locations are not just profitable on their own - they also serve as effective customer acquisition channels, bringing in new users who later engage more deeply with Chewy’s other offerings. This creates a flywheel effect, where customers enter through vet care and then purchase food, medication, and insurance through the online platform, increasing their lifetime value. Chewy is also building tools for veterinarians. Its PracticeHub platform integrates directly with vet clinics’ existing systems, allowing them to approve prescriptions and generate revenue while Chewy takes care of inventory, fulfillment, and customer service. As of early 2025, approximately half of all veterinary practices in the U.S. are enrolled in the platform.

Autoship and Chewy+ are important reasons to invest in Chewy because they strengthen customer loyalty, increase recurring revenue, and support long-term growth by reinforcing each other’s success. While they are technically separate programs, they work together in a way that makes Chewy’s business model more stable, more predictable, and harder to compete with - this is why it makes sense to group them together. Autoship allows customers to schedule recurring deliveries of pet essentials like food, medication, and litter. This not only makes life more convenient for pet owners but also generates a steady stream of revenue for Chewy. Customers enrolled in Autoship tend to be highly loyal and spend more over time, which improves customer lifetime value. It also helps Chewy plan better, manage inventory more efficiently, and reduce customer acquisition costs. Chewy+, on the other hand, is a paid membership program that offers benefits such as free shipping and other perks in exchange for a low annual fee. It appeals to a broader audience by enhancing convenience and value - especially for customers who order frequently or want premium service. Importantly, Chewy+ helps convert trial users into paying customers, expanding Chewy’s reach into demographics that might not have shopped regularly with the brand otherwise. What makes these two programs especially powerful is the way they support each other’s growth. As management has noted, Autoship and Chewy+ act as flywheels: customers who sign up for one often end up joining the other. A Chewy+ member who receives consistent value through free shipping is more likely to set up regular deliveries through Autoship. Likewise, an Autoship user who already relies on Chewy for recurring orders might see even more value in Chewy+ and convert to a paid member. This interaction creates a reinforcing loop: the more customers engage with one program, the more likely they are to engage with the other. That not only deepens customer relationships but also creates stickier behavior - making it harder for competitors to lure customers away. And because both programs are designed to operate at scale with relatively low ongoing costs, they also improve profitability as they grow.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,91, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 27% in the next five years, but I use 15% as the highest. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Chewy's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $27,30. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Chewy at a price of $13,65 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 596, and capital expenditures were 144. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 101 in our calculations. The tax provision was -241. We have 408,8 outstanding shares. Hence, the calculation will be as follows: (596 – 101 - 241) / 408,8 x 10 = $6,21 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. Chewy's Free Cash Flow Per Share at $1,11 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $17,52.

Conclusion

I believe that Chewy is an intriguing company with great management. The company has built a moat through its customer service culture, recurring revenue model, healthcare integration, fulfillment scale, and technology platform. Its return on invested capital has been erratic, which is not unusual for younger companies. However, moving forward, I expect the company to achieve a ROIC above 10 percent annually as it is now more profitable, managing its capital more effectively, and operating more efficiently. Chewy has also been growing its free cash flow and levered free cash flow margin every year, which is encouraging. Competition is a risk because Chewy operates in a crowded market alongside much larger and better-resourced players like Amazon, Walmart, and Petco. These companies offer lower prices, wider reach, and the convenience of both online and offline shopping. The ease of comparing prices online, along with strong competition in retail and pet healthcare, makes it harder for Chewy to maintain pricing power and customer loyalty. Reliance on third party suppliers is a risk for Chewy because any disruption in supply, whether due to delays, limited capacity, or the loss of key brands, can impact its ability to meet customer demand and maintain margins. If suppliers shift support to competitors or sell directly to retailers on better terms, Chewy could face higher costs, reduced product variety, and weaker customer retention. Customer growth saturation is a risk because much of Chewy’s early customer base has already been captured, making it harder and more expensive to attract new shoppers. As growth slows and marketing costs rise, Chewy may struggle to maintain profitability unless it can keep customers engaged and spending regularly. Trends in the pet industry support a long term investment in Chewy, as rising pet humanization and premiumization are driving higher spending per pet even during economic downturns. At the same time, the shift toward online shopping continues to accelerate, playing directly to Chewy’s strengths as a leading ecommerce platform. Expanding into pet healthcare is a reason to invest in Chewy because it gives the company access to a large, high margin market that complements its core business and strengthens customer loyalty. With services like online pharmacy, telehealth, in clinic care, and vet tools like PracticeHub, Chewy is building a comprehensive pet health ecosystem that not only drives new revenue but also deepens engagement across its platform. Autoship and Chewy+ are strong reasons to invest in Chewy because they create predictable recurring revenue and reinforce customer loyalty. By working together, each driving engagement with the other, they form a self reinforcing loop that deepens customer relationships, boosts retention, and makes Chewy’s business more stable and competitive over time. While there are many things to like about Chewy, I still think there are too many uncertainties for my liking. Hence, I will not be investing in Chewy at this time.

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