Chewy Earnings: Long-Term Narrative Intact as International Expansion Begins; Shares Still Cheap

We expect to maintain our $42 fair value estimate for narrow-moat Chewy as we mull over quarterly results, with sluggish active customer growth (we're lowering our annual forecast to 1.3% growth from 3% prior) offset by time value and better-than-expected net sales per active customer. Shares jumped 13%-14% after the release and a modest 2023 guidance raise, though we view the magnitude of the lift (a 0.45% bump to net sales targets at the midpoint, and a 0.25% lift to adjusted EBITDA margin) as an insufficient catalyst for the market's reaction. Rather, we view the surge as having more to do with partially unwinding unnecessarily punitive pre-earnings expectations than of any structural changes to the business, with shares still down 17% over the past quarter. Our long-term forecasts remain effectively intact, calling for 12% average annual sales growth over the next decade and 6.7% operating margin in equilibrium.