Lower Pet Household Formation and Hard Goods Spending Pinch Q2 Results for Chewy; Shares Cheap

Narrow-moat Chewy posted mixed second-quarter results, with $2.43 billion in sales and $0.05 in diluted EPS narrowly missing our $2.44 billion top-line estimate, but outstripping our forecast EPS loss of $0.10. Notably, the firm lowered its sales guidance for the year to $9.9-$10 billion from $10.2-$10.4 billion (still up 12% from a year ago at the midpoint) on softer new pet household formation—the largest driver for hard goods sales and customer acquisition—and consumer trade down, consistent with declining real income and inflation in nondiscretionary spending categories. While there's plenty to like about Chewy's business model, from net cohort revenue retention above 100%, expansion into sticky categories like pet healthcare and insurance, and the recession resistance of the category more broadly (PetSmart saw positive same store sales through 2007-2009), we now expect near-term headwinds to bleed into 2023. More concretely, we expect slower customer acquisition, belt-tightening in the discretionary hard goods category, and commensurately lower sales-driven leverage to underpin a high-single-digit haircut to our $47.50 fair value estimate, broadly in line with aftermarket trading.