Chewy Earnings: Despite Challenging Pet Care Backdrop, We're Salivating at Chewy's Prospects

The pet care industry remains challenging, with sluggish new pet household formation, increasing price sensitivity, and an uptick in industry promotional activity pinching results across the sector. Nevertheless, we take a sanguine view of Chewy's prospects, with the firm's large autoship user base and plenty of nascent initiatives paving the way toward long-term excess returns. While we anticipate sluggish user growth in 2023 and 2024 amid a challenging macroeconomic environment in the firm's home U.S. market (trimming our net active buyer growth forecast to 3.5% in 2024 from 7.5% previously), we see further margin upside from the firm's ads business than initially contemplated after positive management commentary regarding the initial pilot, offsetting that effect. On balance, we expect to leave our $42 fair value estimate largely unchanged, leaving shares trading at bargain prices after a modest dip in aftermarket trading.