Chewy Earnings: Market Likes Repurchase Program and Profit Improvements

Key Morningstar Metrics for Chewy:

• Morningstar Rating: 4 stars
• Fair Value Estimate: $27.00
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

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.