Chewy Earnings: Softer Profit Guidance Tough to Swallow

Weakness in discretionary pet product spending and soft 2023 profit guidance sent narrow-moat Chewy’s CHWY 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.

Chewy’s fourth-quarter results were solid, with $2.71 billion in net sales and $0.01 in diluted EPS edging our $2.64 billion and $0.09 EPS loss estimates. The firm took market share as net spending per active customer grew 15%, but the combination of elevated churn from large 2020 and 2021 customer cohorts and a decline in discretionary hard goods purchases (down 7% annually) drove a 1.1% decline in active customers to 20.4 million, behind our 20.5 million forecast. Consistent with management guidance, we expect modest customer growth in 2023, but don’t anticipate a return to prepandemic user acquisition until 2024 given macro headwinds. More importantly, we expect to lower our net income estimates by about $170 million in 2023 to align with margin guidance, suggesting a modest EPS loss in lieu of our prior expectation for positive $0.33 in EPS during 2023.

We remain impressed with Chewy’s commitment to disciplined growth, with investments in automated fulfillment centers and import routing bearing fruit as the firm posted its first full year of profitability. While international expansion poses a near-term margin drag, e-commerce category penetration clocks in in the midteens in Western Europe against roughly 30% in the U.S. (Euromonitor), suggesting that the effort is cogent, and we continue to view high-single-digit adjusted EBITDA margins as plausible for the e-commerce pet care stalwart.