Chewy's Pet Services Dominance To Fuel Premiumization And Overseas Expansion, Analyst Predicts

JMP Securities analyst Nicholas Jones initiates coverage on Chewy Inc CHWY with a Market Outperform rating and a price target of $50.
Pet owners continue to humanize their pets, evident in high search interest in fresh food and pet toys.
The spike in search interest and traffic volumes to CHWY's website during the 4Q holiday season indicates pets are top of mind as owners aim to include them in holiday festivities.
Chewy's dominant position within pet-related retail and services positions it well to capture a highly impassioned audience that is increasingly humanizing their pets.
This behavior should continue to increase the premiumization of pets driving consumers to allocate more discretionary spending to those pets longer term.
Further, CHWY's auto-ship subscription model adds more predictability to future revenue than typically seen in an e-commerce marketplace, which he believes warrants a premium in CHWY's multiple.
Lastly, CHWY's looming international expansion will add incremental revenue to current consensus estimates but weigh on EBITDA margin expansion near term.
Assuming Canada and Western Europe are potential entry points for expansion, the analyst sees a broader opportunity of more than $64 billion, adding incremental upside to his current top-line estimates.
The analyst sees an upside to CHWY's multiple and estimates over the next twelve months.
Overall, CHWY is well-positioned to benefit from an increasing share of pet-related spending shifting online. Further, its specialized focus within the category should enable it to cater to customers in ways broad-based retailers cannot. The analyst believes its auto-ship solution can likely win share from brick-and-mortar incumbents as consumers opt for convenience.
The analyst believes the valuation premium is warranted given that nearly 75% of CHWY's revenue is recurring from impassioned customers, faster revenue growth compared to the comp group, its recent announcement of intent to launch in international markets, providing incremental upside to its TAM, and expansion into higher margin verticals (e.g., 1P brands, healthcare and insurance, and sponsored ads), driving improving margins.
Price Action: CHWY shares traded higher by 0.37% at $35.36 on the last check Tuesday.

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