Wedbush: Chewy Will Account For Half Of All Pet Industry Sales Growth

Online pet store Chewy Inc CHWY is well-positioned to benefit from favorable industry-wide trends and the company can account for half of all pet industry sales growth, according to Wedbush.

The Analyst

Seth Basham upgraded Chewy from Neutral to Outperform with a price target lifted from $30 to $35.

The Thesis

Online pet industry sales could account for 25% of total sales by 2023 as consumers continue flocking towards subscription-type consumables through online channels, Basham wrote in the note. This implies online pet industry sales will grow at a compounded annual growth rate of around 22% over the coming five years. As Chewy continues to establish a dominant position in the online pet space, the company will see outsized benefits.

Meanwhile, Basham said Chewy continues to show favorable company-specific economics, including flattish customer acquisition costs and accelerating revenue per customer. Part of this can be attributed to a successful expansion into the new $5 billion pharmacy pet market.

Looking forward, Chewy's gross margin growth potential of 220 to 520 basis points from 22.8% in the past 12 months is "very reasonable" as a favorable sales mix towards private label sales offers "ample support." The company can also see benefits from better fulfillment cost leverage and SG&A leverage in 2020.

Price Action

Shares of Chewy were trading higher by 1.5% at $28.89.

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