Company Reports

Narrow-moat Chewy reported decent quarterly results, with $2.83 billion in revenue and $0.07 in diluted earnings per share edging our $2.79 billion and $0.04 estimates, respectively. The petcare retailer continues to make progress in key areas, with traction in its nascent Chewy ads business, quarterly autoship penetration of 76.4% (up 310 basis points), and $67 million in quarterly free cash flow (up 59% annually) continuing to show positive momentum. Nevertheless, we plan to trim our $27 intrinsic valuation by about 25% as we lift the firm's cost of equity to 9% from 7.5%, a move that we believe better reflects its sensitivity to systematic risk. More concretely, an absolute decline in pet households in 2023 and sluggish hard goods sales amid economic pressure appears suggestive of medium, rather than low revenue cyclicality. Absent that change, we'd plan to reduce our valuation by just a low-single-digit percentage on cautious 2024 guidance. Despite the haircut, shares look attractive, and Chewy remains one of our top picks in the online commerce space.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and limited cyclicality representing just a handful of alluring structural features in an $144 billion US market (American Pet Products Association). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $144 billion U.S. market (estimated). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

We plan to lower our $38 fair value estimate for narrow-moat Chewy by a mid-single-digit percentage after digesting the firm's investor day presentation, with slower projected sales growth more than offsetting encouraging margin guidance. We expect to trim our growth expectations substantially—to an 8.1% 10-year annual growth rate from 10.3% prior—in line with long-term guidance for high-single-digit annual expansion. Simultaneously, we plan to nudge up our 2032 operating margin estimates to 7.8% from 6.9% previously as we incorporate the impact of 15% EBITDA margin flow-through guidance and margin accretion from healthcare, ads, and automation initiatives.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $137 billion U.S. market (American Pet Products Association). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Narrow-moat Chewy's third-quarter results had investors looking elsewhere for treats, with the firm missing FactSet consensus sales estimates for the first time in a year and lowering its full-year guidance to 10% top-line growth (from 10%-12%). Profitability was decent, with $10 million in operating loss edging our $15 million operating loss forecast. We believe the firm remains well-positioned for the long term, standing to benefit from an ongoing category e-commerce mix shift, pet humanization, and premiumization trends. Nevertheless, a 16% decline in pet adoption suggests that industrywide pressure is likely to persist into 2024. We plan to trim our 2024 top-line expectations accordingly, to 4%-5% growth, down from over 9% previously, mostly driven by flat industrywide pricing and expectations for anemic growth in active customers (1%) in the year to come. The net effect is a high-single-digit cut to our $42 fair value estimate, consistent with the market's reaction.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $137 billion U.S. market, as noted by the American Pet Products Association. While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

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.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $130 billion U.S. market. While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

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.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $130 billion U.S. market. While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Weakness in discretionary pet product spending and soft 2023 profit guidance sent narrow-moat Chewy’s shares tumbling, but the firm's long-term prospects remain intact. In comparison with competitor Petco's results earlier on March 22 (shares down 17.5% on the day), Chewy's fourth-quarter results looked sterling, despite guidance for a flat to slightly down adjusted EBITDA margin in 2023 on a more intense promotional environment and investments in an upcoming international push. On balance, we expect to lower our $44 fair value estimate by a mid-single-digit percentage.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

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.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

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.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Narrow-moat Chewy posted impressive first-quarter results, including $2.43 billion in sales (up 13.7%) and $0.04 in EPS, clocking in above our estimates of $2.42 billion and a $0.06 loss, respectively. Healthy growth in the active customer base (4.2%, representing a whopping 82% three-year stack) and net sales per active customer, or NSPAC, (15% to $446), indicate that the operator continues to benefit from secular mix-shift towards online fulfillment and premiumization in the pet category. We view the e-commerce pet care retailer’s growth trajectory to persist, driven by the firm’s subscription-driven autoship program (now 72% of net sales), combined with a maintained focus on driving traffic by leveraging customer attribution data, factors which underpin our narrow economic moat rating. Furthermore, the firm is set to launch its wellness and insurance plan CarePlus in the next few weeks, to tap into the underpenetrated pet insurance market ($2.5 billion total addressable market, per management), which we view as prudent.

Narrow-moat Chewy shares have been on a roller coaster ride, shedding about two thirds of the firm's market cap over the past six months. That's quite a bit worse than the Nasdaq composite (down 19%) and softer than even Direxion's work-from-home ETF (down 38%), which strikes us as harsh. As we revisit our assumptions in light of a broader risk repricing in equity markets, we remain confident in our long-term forecasts for high-single-digit average annual growth in active customers, high-single-digit growth in annual sales per active customer, and roughly 100 basis points of average annual margin expansion, all of which underpin our $47.50 fair value estimate. Despite an 8% gain in intraday trading, shares continue to trade at about a 40% discount to our intrinsic valuation.