Chewy Posts Solid Earnings as Petcare Industry Proves Downturn Resistant; Shares Fairly Priced

Narrow-moat Chewy reported third-quarter earnings narrowly ahead of our expectations, with $2.53 billion in sales and a $0.01 diluted EPS gain edging our $2.44 billion and $0.01 loss forecasts, respectively. The gain was driven by swelling net spend per active customer, which hit a company-record annualized rate of $477, up roughly one third from the firm's pre-pandemic comparable quarter. As we consider the firm's expansion into adjacent categories like pet insurance and healthcare in tandem with a model that naturally generates cohort net revenue retention north of 100%, we expect that figure to continue to grow, approaching $800 by the end of the decade. That mark represents a sizable chunk of the roughly $1,360 U.S. pet households spend in the category today, and validates the firm's strategy to become a de facto one stop shop for U.S. pet owners, offering customers ever fewer reasons to churn off the platform. Ultimately, we saw little in the results that changes our long-term forecasts, and expect to raise our $43.50 fair value estimate by a low-single-digit percentage, consistent with time value. Shares trade in a range we'd consider fairly valued.