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Chewy Earnings: Market Likes Repurchase Program and Profit Improvements

Healthcare business drives revenue beat; Chewy stock undervalued.

The logo for Chewy appears above trading posts on the floor of the New York Stock Exchange.
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Chewy Inc

Key Morningstar Metrics for Chewy:

What We Thought of Chewy’s Earnings

Narrow-moat Chewy CHWY reported strong first-quarter results, with growth in its healthcare business driving a modest revenue beat, while progress in its sponsored ads business and the mix shift toward higher-margin healthcare drove strong margin performance. While the firm maintained its guidance of 4%-6% sales growth for the full year, it increased its adjusted EBITDA margin prognosis by 40 basis points at the midpoint, driving our planned mid-single-digit percentage increase to our $27 fair value estimate. Shares continue to look cheap, despite a 26% surge in intraday trading.

We posit that the strong market reaction was reflective of the firm’s inaugural $500 million share repurchase program and unnecessarily pessimistic forecasts regarding the firm’s ability to execute on its investor day road map.

During the quarter, revenue of $2.88 billion and diluted EPS of $0.15 topped our $2.85 billion and $0.04 expectations. The firm’s 3.1% revenue growth is likely suggestive of category share gains, driven by 6.4% growth in its autoship program and 10.7% growth in the healthcare and specialty businesses. Those categories drove a 9.6% annual increase in net spending per active customer to $562, and with just 20% of Chewy customers utilizing the firm’s healthcare offerings, we continue to see plenty of room for growth in that important metric. On the active customer growth side of the ledger, the balance between pet adoptions and pet relinquishments turned positive for the first time in more than a year, with adoptions accounting for roughly a third of total pet acquisitions—and reflective of broader consumer behavior in the category. We expect the firm to return to positive net user growth in the fourth quarter of 2024.

Ultimately, we’re encouraged by progress in the promoted listings and healthcare initiatives, which should provide a long-term gross margin tailwind for Chewy, but didn’t see much in the quarter that would change our constructive long-term thesis.

Chewy Stock vs. Morningstar Fair Value Estimate

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Sean Dunlop, CFA

Senior Equity Analyst
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Sean Dunlop, CFA is a senior equity analyst on the consumer team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers restaurants and e-commerce stocks.

Before joining Morningstar in 2020, Dunlop worked with All Nations Sports Academy, a small nonprofit in the Houston area.

Dunlop holds a bachelor's degree in business economics and Spanish from Wheaton College. He also holds the Chartered Financial Analyst® designation.

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