Chewy's Conservative Guidance Appropriate Amid Macro Economic Volatility, Analyst Says

Needham analyst Anna Andreeva reiterated a Buy rating on the shares of Chewy Inc CHWY with a price target of $55.
The analyst said Chewy's Q3 Net Sales Per Active Customer (NSPAC) maintained mid-teens run-rate as the company added new product categories and expands its catalog with the oldest cohort spending $1,000/year versus Year 1 cohorts at $100-$200/year.
Pricing and units contributed equally to growth in 3Q22, the analyst reported.
Management expects one round of incremental cost increases in 1Q23 and for both units and price to contribute to sales.
The analyst noted net ads were positive first time this year as gross ads accelerated 6% q/q and grew 9% y/y, which coincided with a slight downtick in churn.
Advertising expenses increased 18% y/y, and 5% - 7% range is still the right level for FY23.
4Q22 gross margin is expected lower than 3Q22, which the analyst views as conservative given that the industry is still considered rational and compares easing substantially.
The analyst cited that Chewy has plenty of initiatives to drive sales and margins between automated FC's, supply chain/logistics, sponsored ads, insurance and new private label brand.
The pet space, the analyst said, is defensive and demand is inelastic plus the headwinds from last year across the supply chain and wage/ labor pressures are dissipating, with sell-side estimates poised for upside.
The analyst raises the '22 and '23 estimates and expects more positive estimate revisions to drive the stock higher.
Price Action: CHWY shares are trading higher by 6.51% at $44.70 on the last check Friday.
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