Chewy vs. BARK: Which Pet Stock is a Better Buy?

The demand for pet ownership has risen greatly during the COVID-19 pandemic. For example, Today's Veterinary Business research revealed that around 11.3 million Americans got a new pet during the pandemic. Consequently, this trend has increased spending on pet food and medications. 

According to Fortune Business Insights, the global pet food market is projected to reach $136.82 billion, growing at a CAGR of 4.96% between 2021and 2028. So, companies from the given industry should capitalize on this growth. The pet care industry, which is represented by the ProShares Pet Care ETF (PAWZ), has demonstrated moderate returns of about 5.3% since the beginning of the year.

Keeping that in mind, today, I intend to analyze and compare two pet stocks: Chewy, Inc. (CHWY) and BARK, Inc. (BARK). Based in Dania Beach, Florida, CHWY is an e-commerce company that offers over 70,000 products for pets from 2,500 partner brands, including pet food and treats, pet medications, and other pet-related services. Its shares are down 37.3% year-to-date. 

Founded in 2012, BARK offers products, services, and content for dogs. It operates across two business segments: Direct to Consumer and Commerce. Shares of BARK are down 69.37% year-to-date.

Recent Developments 

On December 7th, Chewy announced that it had partnered up with pet medical insurance company Trupanion, to provide various pet health insurance options and wellness plans to its over 20 million clients. Under the terms of the deal, the company will provide both preventative care wellness plans and comprehensive insurance plans for accidents, illnesses, and chronic conditions. In addition, Chewy will be able to pay veterinarians directly through Trupanion’s proprietary software, leading to lower out-of-pocket costs. 

Financial Overview & Analysts Estimates

On December 9th, Chewy released a mixed third-quarter report amid supply chain issues, labor shortage, and high inflation, leading to a post-earnings sell-off. In Q3, the company’s revenue grew 24.2% year-over-year to $2.21 billion, which is in line with the Wall Street revenue estimates. Also, Chewy reported a GAAP EPS of ($0.08), missing analysts' consensus by $0.04.

Its gross profit margin improved by 90 basis points from the same period last year to 26.4%, while its net income margin expanded 30 basis points from the year-ago value to (1.5%).

The company reported an Adjusted EBITDA of $6.0 million, representing a 9.9% year-over-year increase.

For the fourth quarter, the analysts expect CHWY's EPS to stand at ($0.08), while its top line is expected to demonstrate 18.40% year-over-year growth to $2.42 billion.

BARK's top line has increased by 39.1% on a year-over-year basis to $120.2 million in the second fiscal quarter of 2022, missing estimates by $1.7 million. The revenue growth was driven by an increase in Subscription Shipments, higher average order value, and the addition of new retail partners. BARK's Non-GAAP EPS came in at ($0.07), beating the consensus by $0.01. 

The company’s Adjusted EBITDA stood at ($8.78 million) compared to $1.07 million as of September 30th, 2020.

When it comes to the next quarter, the analysts see BARK's EPS at ($0.14). Also, a $137.3 million average revenue estimate for the third fiscal quarter of 2022 indicates 14% growth on a quarter-over-quarter basis.

Comparing Valuations & Profitability

In terms of Forward EV/Sales, CHWY is presently trading at

2.53x, which is 102.4% higher than BARK, whose multiple is coming in at 1.25x. Taking a look at the Forward P/S multiple, the CHWY's P/S multiple of 2.64x is about 77% higher than BARK's 1.49x. So, BARK looks relatively affordable here. 

Despite relatively a high valuation, Chewy has better profitability metrics.  Although CHWY has a lower gross profit margin, its EBIT margin of 0.15% and EBITDA margin of 0.57%, respectively, are well above BARK’s negative values. Also, Chewy has levered free cash flow margin TTM and net income margin TTM of 2.37% and 0.13%, respectively, compared to BARK's negative figures. 

Finally, Chewy is projected to deliver a forward revenue growth rate of 29.92%, exceeding the sector's median figure by 244.41%. 

The Bottom Line

I believe CHWY, at these levels, is a better long-term “buy” candidate. The company is more attractive from a fundamental standpoint. It offers a vast amount of products through one of the fastest-growing distribution channels, allowing it to achieve a higher diversification within a pet care market. In addition, pet medical insurance options should boost its 2022 top and bottom line as well.

CHWY shares were trading at $55.30 per share on Thursday morning, down $1.07 (-1.90%). Year-to-date, CHWY has declined -38.48%, versus a 27.31% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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