If you are looking to buy a stock, it makes sense to understand the industry in which the company operates. Ideally, these companies should be part of expanding addressable markets, allowing them to increase revenue and earnings over time.
In recent years, the pet food market is attracting several players and is valued at US$130 billion in just the United States. Keeping these factors in mind, let’s see which between Chewy (NYSE: CHWY) and Pet Valu (TSX: PET) is a better stock for investors in April 2023.
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The bull case for Chewy stock
Valued at a market cap of US$15 billion, Chewy is among the largest online pet food retailers in the world, with sales of $10 billion in the last four quarters. In the December quarter, Chewy increased sales by 13% year over year, while Autoship customer sales were up 18%.
Autoship is Chewy’s subscription program that allows the company to generate recurring sales each month. Subscription sales now account for more than 70% of total revenue and are a key driver of online sales for Chewy.
While Chewy’s customer base fell by 1.2% year over year in the fourth quarter (Q4), it is now looking to gain traction in several international markets. Analysts expect Chewy’s sales to rise to US$11.2 billion in 2023 and US$12.5 billion in 2024. If it successfully enters new markets, these estimates should move significantly higher.
The pet market is also fairly recession-resistant and has grown at a reasonable pace, despite near-term headwinds. Chewy’s management expects demand for non-discretionary products such as healthcare and consumables to remain steady in 2023. In addition to the Autoship program, Chewy has increased its suite of products and services, such as pharmacy, driving customer engagement rates higher.
Analysts remain bullish on CHWY stock and expect it to gain around 30% in the next 12 months.
The bull case for Pet Valu stock
Compared to Chewy, Pet Valu is a much smaller company, valued at $2.6 billion by market cap. Pet Valu has increased sales from $648 million in 2020 to $952 million in 2022. In this period, its net income has risen from $28.6 million to more than $100 million. Despite a challenging macro environment, Pet Valu ended 2022 with same-store sales growth of 17% year over year.
Pet Valu is Canada’s largest pet specialty retailer, with a share of 18%. It operates 744 stores in 10 Canadian provinces, allowing the company to service 75% of the total market. Since 2016, Canada’s pet sales have grown at an annual rate of 9% and touched almost $13 billion in 2022.
Pet Valu aims to expand its retail footprint to 1,200 stores and drive same-store sales by expanding its digital channels. In the last six years, its store count has increased by 6%, while same-store sales are up 12%.
The Foolish takeaway
Shares of Chewy are priced at 1.4 times forward sales, while the price-to-sales multiple for Pet Valu is much higher at three. Moreover, the top-line growth estimates for both these companies are similar in the next two years.
But Pet Valu is reporting consistent profits and even pays investors a dividend of $0.40 per share, translating to a yield of 1.1%. Moreover, Pet Valu is trading at 19 times 2024 earnings, which is very reasonable. Comparatively, the price-to-2024-earnings multiple for Chewy is close to 240.
I believe Pet Valu’s improving profit margins make it a better bet right now.
