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 CHWY 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.

More concretely, Chewy’s $2.78 billion in sales (up 14.3% annually) and $0.04 in diluted earnings per share narrowly edged our $2.75 billion and flat EPS estimates. While the firm’s guided range implies sequential softening, we’re encouraged by gross customer additions figures ahead of prepandemic levels (stated qualitatively), which suggests that a return to the multimillion net customer additions in the medium term remains plausible once macroeconomic pressures ease.

More importantly, the firm’s ever-important net spending per active customer metric ticked up to $530 (up 14.7%), with its mature cohorts continuing to migrate an increasing share of their pet category spending onto the platform. This is a dynamic that we’d expect to continue to play out as customer acquisition slows on a percentage basis, with the firm’s 75.5% autoship penetration suggestive of a loyal, valuable customer base that should power durable economic profitability over the long term for the U.S. pet care e-commerce leader.