Investors Take A Bite Out Of Chewy's Stock, But The Street Isn't Saying 'Good Boy!'

Chewy Inc CHWY, an online portal for consumers to buy items for the pets, reported second-quarter results highlighted by a revenue beat but incremental public company costs impacted any upside to EBITDA.

What Went Well And Wrong

Chewy's "solid" quarter is highlighted by a 43% increase in revenue and 410 basis point EBITDA margin expansion, Raymond James analyst Aaron Kessler wrote in a note.

Other key positive takeaways from the quarter include: a net addition of around 700,000 customers, revenue per customer rose 10% from last year, Autoship revenue rose 49% year-over-year and accounted for 69.3% of total sales, gross margins expanded 300 basis points to 23.6% from improved product margin and supply chain efficiencies and management improved its sales outlook from 32-34% to 35-36%.

On the other hand, Chewy's SG&A expenses in the quarter came in at $245 million which was "significantly" higher than the $191 million expected due to increased stock based compensation expenses, Kessler wrote.

Related Link: 3 Analysts React To Chewy's First Earnings Report

What's Next

Chewy's management guided its third quarter revenue to be $1.17 billion and lifted its full year 2019 revenue from $4.675-$4.75 billion to $4.75-$4.80 billion, Wedbush analyst Seth Basham wrote in a note.

However, at the midpoint the current guidance implies a 610 basis point sequential deceleration in year-over-year revenue in the third quarter and a 1,110 basis point deceleration on a two-year stacked basis.

"While growth remains very strong in absolute terms, the rate of growth is slowing due to the law of large numbers," Basham wrote. "That said, guidance may be conservative, leaving room for upside assuming continued strong execution, benefits from pharmacy growth and a stable competitive environment."

Chewy's longer-term outlook remains favorable as it can take advantage of the broader growth in e-commerce, especially in the pet category, Barclays analyst Deepak Mathivanan wrote in a note. The company's new data management platform and dataset integration should also help the company improve marketing efforts and cross-selling opportunities.

However, the stock is trading at around two times 2020 estimated revenue which already implies "meaningful" upside versus current forecasts, the analyst said.

Chewy reported "another solid quarter" which signals ongoing execution against its long-term objectives, Nomura Instinet analyst Mark Kelley wrote in a note. Nevertheless, the stock's valuation needs to be considered and a $32 price target is based on three times sales and six times 2020 gross profit estimates -- both of which are in-line with peer averages.

Ratings And Price Targets

• Raymond James maintains at Market Perform, no price target.
• Wedbush maintains at Neutral, unchanged $30 price target.
• Barclays maintains at Equal-Weight, price target lifted from $32 to $33.
• Nomura maintains at Neutral, price target lowered from $36 to $32.

Shares of Chewy were trading lower by more than 7% Wednesday and hit a new all-time low of $27.79.