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Last Christmas we highlighted an insider purchase by an independent director of Chewy and wrote the following about the company,
With earnings related quiet periods upon us, I was not expecting to see a lot of insider activity last week but was pleasantly surprised to see a number of interesting purchases last week. A pair of mortgage REIT CEOs found their way into our list of top 5 insider purchases but the purchase that captured my attention the most was the sixth largest purchase of the week. James Star, the Executive Chairman of Canadian investment firm Longview Asset Management, purchased $1.79 million worth of Chewy (CHWY) shares on the open market. This is the first insider purchase at Chewy in well over two years as the pet products focused company went on a roller coaster ride from its $22 IPO price in June 2019 to a high of nearly $120 by February 2021 before giving back large swaths of those gains and dropping to the low $50s.
The pandemic related tailwinds that fueled pure play e-commerce retailers like Chewy and Wayfair (W) have subsided and this is reflected in the Chewy’s decelerating revenue growth rate and bottom line losses. Gross margin of 26.4%, despite a 90 basis point improvement year-over-year is also not that exciting. Looking at the cash flow statement, the company is generating significant free cash flow and non-cash stock compensation expense has been coming down for several quarters. During the last 12 months, while net income was just $10.8 million, free cash flow was $169 million. With an enterprise value of $24.4 billion, the stock is certainly expensive on an EV/FCF multiple but doesn’t look that expensive at an EV/Sales of 2.86. If the company can grow or even maintain its current rate of growth (24.14% last quarter) while getting a better handle on expenses, it would be worth exploring Chewy further.
The latest purchase by Mr. Star last week is nearly thrice the size of his prior $1.79 million purchase and the stock is down nearly 48% from his prior purchase. Since we last wrote about the company, both net income and free cash flow turned negative for the trailing twelve month period. The company paying down part of its ballooning accounts payable balance impacted free cash flow negatively two quarters ago. Revenue growth continued to decelerate with year-over-year revenue growth coming in at 13.73% last quarter. The silver lining is that the company reported a surprised GAAP profit of 4 cents per share last quarter compared to expectations of a loss of 13 cents.