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