Profit ratio

This growth stock is indeed struggling with inflation, but should investors buy now?

The coronavirus pandemic has had a host of secondary and tertiary consequences beyond the millions of deaths it has caused. People have been less willing to go to work when it means a high risk of exposure to the virus. Governments have repeatedly imposed restrictions on businesses in their attempts to stem COVID outbreaks, but it has disrupted supply chains around the world – and many of those disruptions have proven stubbornly persistent.

Meanwhile, thanks to government stimulus measures to support households and businesses through the crisis, demand has remained robust. Of course, when rising demand is combined with falling production, the result is usually inflation, and that is also the case this time around.

Pet supplies retailer Soft (CHWY 7.11%) has so far effectively managed the impacts of inflation, but does that mean investors should buy its shares now?

Chewy demonstrates operational skills

During its first quarter of fiscal 2022, which ended May 1, Chewy’s gross profit margin declined 10 basis points to 27.5%. That’s a surprisingly good result for an e-commerce business that needs to ship all of the products it sells directly to consumers.

Fuel prices, which were already high due to supply and demand imbalances before Russia invaded Ukraine, have since surged. Moreover, it has not been easy to find enough workers to operate its distribution centers. Given these and other inflationary pressures, it’s impressive that Chewy has managed its profit margins so well.

Of course, it’s easier for a company to maintain profit margins if management is willing to accept lower sales. Indeed, a company may increase its prices to protect its margins, but it may lose sales to its competitors. This was not the case for Chewy. Net sales in its first fiscal quarter actually rose 13.7% year over year.

Instead, Chewy maintained profitability through operational improvements. For example, it adjusted inventory allocation to reduce the number of long-distance deliveries, which are more expensive, by 15%. It also began to manage incoming inventory in larger batches, which reduced its costs. Finally, it is expanding its activities in its new automated facilities, whose variable costs are 19% lower than those of its older facilities.

CHWY Turnover (Annual) given by Y-Charts

Chewy’s recent performance extends his strong execution pattern. From 2016 to 2022, its revenues have grown from $901 million to $8.9 billion. During the same period, the gross profit margin increased from 16.6% to 26.7%. This suggests that the recent success is no accident – the company has a habit of finding ways to become more efficient.

A Good Time to Consider Buying Chewy Stock

Table of PS CHWY ratios

PS CHWY Report given by Y-Charts

Chewy trades at a price-to-sales ratio of 1.7, which is close to its lowest valuation by this metric in its young history as a public company. Therefore, now may be the right time for long-term investors to consider adding Chewy stocks to their portfolios. The company is demonstrating operational skill in challenging circumstances while maintaining robust revenue growth.