Chewy Gets A Bite Of Confidence: Morgan Stanley Upgrades To Overweight Despite Market Gloom

Morgan Stanley analyst Lauren Schenk upgraded Chewy Inc CHWY to Overweight from Equal-Weight at a lowered price target of $28 (from $31).

The analyst notes that CHWY has declined more than 50% since mid-July owing to forward customer growth concerns but sees the move as overdone.

Schenk says CHWY is still gaining market share on both a revenue and customer basis and sees an attractive combination of better-than-expected revenue growth and ongoing margin expansion despite a weak pet industry macroeconomics market.

Also, pet food price inflation is cooling quickly (8% in Sept. vs. 15% in Jan), which should limit a further shift from premium to value, and CHWY's hard goods segment returned to growth in Q2, writes the analyst.

Schenk forecasts CHWY’s EBITDA margin of 5% and 10% in FY25 and FY30, driving material FCF generation of ~$450 million, assuming minimal marketing expense leverage from weak lifetime value/customer acquisition cost.

Schenk expects advertising and category mix shifts to drive annual gross margin expansion of ~60bps to 70 bps.

The analyst estimates EPS loss of $(0.06) in Q3 and $(0.01) in Q4 FY23. 

Price Action: CHWY shares are trading higher by 4.20% at $19.36 on the last check Tuesday.