E-commerce was already growing rapidly across the world and the COVID-19 pandemic has fueled its momentum even further. As per the US Census Bureau’s most recent data, e-commerce sales grew 44.5% Y/Y to $211.5 billion in the second quarter and accounted for 16.1% of overall US retail sales compared to 10.8% in the second quarter of 2019.
It's not just e-commerce giants like Amazon that are gaining from the surge in online shopping- more niche players like Etsy, Chewy, Carvana and Wayfair are also flourishing. In this favorable growth environment for e-retailers, we will use the TipRanks Stock Comparison tool to place Chewy and Wayfair alongside each other and see which online stock offers a more compelling investment opportunity.
Chewy is an online retailer of pet food, pet supplies and medications in the US. The company has benefited from the shift of pet product purchases from physical stores to online channels with its revenue growing to $4.8 billion in fiscal 2019 from $422.8 million in fiscal 2015. As per Packaged Facts, internet shopping accounted for 22% of US pet products sales in 2019 up from 7% in 2015.
The pandemic has further accelerated Chewy’s growth. In the first six months of fiscal 2020 (ended Aug 2.), the company’s sales grew about 47% compared to a growth rate of 37% in the entire fiscal 2019. Notably, 2Q FY20 sales increased 47.4% to $1.7 billion with the number of active members growing 37.9% to 16.6 million. Also, net sales per active member increased 3.2% to $356.
Chewy has not yet turned profitable on a GAAP basis. However, thanks to the pandemic-led growth, the company has generated positive adjusted EBITDA for two consecutive quarters. In 2Q, adjusted EBITDA grew 153% Y/Y to $15.5 million.
Looking ahead, the company expects 3Q FY20 sales growth between 38% to 40% and FY20 sales growth in the range of 40% to 41%.
Chewy’s Autoship subscription program has been one of its key growth drivers as per the company and accounted for about 68% of the overall sales in the first half of FY20. This program helps the customer schedule regular deliveries of pet supplies and ensures recurring sales for the company.
Meanwhile, Chewy is aiming to capture more sales from its customers through various initiatives, like offering additional hard goods (like toys and dog beds) through the expansion of its private-label products, gift cards and a focus on pet pharmacy. Aside from boosting sales, the company’s private label products and pharmacy business also help in improving its margins. To support its growing business, the company opened three new fulfillment centers this year, bringing the total to 11 fulfillment centers. (See CHWY stock analysis on TipRanks)
Recently, Chewy announced the launch of its “Connect With a Vet” telehealth service in an attempt to deepen customer relationships. Through this service, pet owners can use the company’s tele-triage platform to connect directly with a licensed veterinarian and seek answers to queries on the health and wellness of their pets and even get referrals to local vets or emergency clinics. Chewy is currently providing this service exclusively to its Autoship customers for free in over 35 states and plans to roll it out nationwide.
Chewy scores a cautiously optimistic Moderate Buy analyst consensus based on 9 Buys versus 4 Holds. Given the 133% spike in shares year-to-date, the average analyst price target of $70.60 indicates a modest upside potential of 4.5%.
Last month, Jefferies analyst Stephanie Wissink upgraded Chewy to Buy from Hold and also raised the price target to $100 from $59 based on the company’s widening moat and favorable dynamics in the pet industry with "digital fluent" millenials driving demand.
Wayfair has been gaining from two favorable trends since the pandemic—rapid shift to e-commerce and customers reprioritizing their spending on home goods instead of travel and entertainment. The company attracts customers through its extensive offerings of over 18 million products, which are sourced from more than 12,000 suppliers. Wayfair caters to the mass market as well as luxury customers with its five sites under the brand names Wayfair, Joss & Main, AllModern, Birch Lane and Perigold.
The online home goods company recently crushed analysts’ expectations when it reported adjusted EPS of $2.30 for 3Q20 compared to an adjusted loss per share of $2.23 in 3Q19 while analysts predicted EPS of $0.80. Even after the reopening of rivals’ physical stores following lockdown-led closures, Wayfair’s 3Q revenue grew 66.5% to $3.84 billion.
Other favorable developments in 3Q included a 50.9% Y/Y growth in active customers in the company’s Direct Retail business to 28.8 million and purchases from repeat customers increasing to 71.9% of total orders compared to 67.3% in 3Q19.
The sales growth might moderate going ahead due to higher competition, but the company continues to expect to deliver strong numbers with 4Q quarter-to-date gross revenue growth trending at about 50% Y/Y. (See W stock analysis on TipRanks)
Meanwhile, Wayfair sees tremendous growth opportunities in the international market, which currently generates just 15% of the company’s overall sales. Mainly, Wayfair highlights that Europe’s total addressable market rivals the size of North America at roughly $300 billion in B2C sales and another $100 billion sales opportunity in B2B.
On Nov. 5, Citi analyst Nicholas Jones increased his price target for Wayfair to $230 from $225 following the company's 3Q earnings. However, he reiterated a Sell rating as he continues to see risk in Wayfair's ability to sustain both its growth trajectory and profitability as COVID-19 restrictions wane and a more normalized competitive environment returns.
With Wayfair shares up a whopping 229% so far this year, the $308.25 price target indicates a possible upside of only 3.7% in the coming months. The Street’s Moderate Buy consensus for Wayfair is based on 13 Buys, 10 Holds and 5 Sells.
Wayfair and Chewy are currently riding a strong e-commerce wave. Competition seems to be more intense for Wayfair as brick-and-mortar home retailers are aggressively ramping up their online presence. Both Wayfair and Chewy score a Moderate Buy Street consensus. But the sentiment seems more favorable for Chewy which has a Buy rating from 69% of the analysts covering the stock compared to 46% in the case of Wayfair.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment