Why Chewy's Stock Remains Range-Bound: A Multi-Analyst Perspective On Future Growth, Margin Expansion, And Customer Behavior

Several analysts lowered the price target on Chewy Inc CHWY following the company's second quarter 2023 results.

The company reported second-quarter FY23 sales growth of 14.3% year-on-year to $2.78 billion, beating the analyst consensus estimate of $2.76 billion. EPS of $0.15 beat the consensus estimate of $(0.05).

Related: Chewy Q2 Earnings Highlights: Revenue Beat, EPS Beat, Autoship Sales Shine Through

RBC Capital Markets analyst Steven Shemesh reiterated an Outperform rating and lowered the price target from $56 to $44.

While the earnings beat is encouraging, management walked back on the analyst's expectation for net add growth in 2H, citing a more price-conscious consumer, the analyst noted.

Given this development, shares are likely to remain range-bound until the investor day later this year, said the analyst.

The analyst pointed out that despite the management's assertion that the promotional environment has remained rational, they noted activity has stepped up quarter-on-quarter.

For FY'23/FY'24, the analyst adjusted the net sales growth estimates to +11.4%/+7.6% (+12.1%/+9.3% prior) and adjusted EBITDA margin estimates to 3.1%/3.7% (3.1%/4.0% prior).

Oppenheimer analyst Rupesh Parikh reiterated an Outperform rating and lowered the price target from $50 to $35.

The lowered PT, according to the analyst, reflected the recent re-rating in shares due in part to a higher interest rate backdrop and less upside potential in the model. 

On the negative side, net customer adds declined sequentially and commentary suggested greater uncertainty on the ability to return to positive active customer growth in 2H, said the analyst. 

The analyst observed that this has represented a key investor concern, which is now likely to persist through at least Q4.

Raymond James analyst Rick B. Patel reiterated an Outperform rating with a price target of $33.

While gross customer adds are above '19 levels, the negative impact of churn remains a headwind, said the analyst.

Net Sales Per Active Customers (NSPAC) remains a powerful growth driver which the analyst expects to continue.

The analyst pointed to more signs of a cautious consumer, but higher spend per customer remained a strong tailwind.

Needham analyst Anna Andreeva reiterated a Buy rating and lowered the price target from $55 to $45.

Churn from large COVID cohorts is still expected to diminish in 2H23, albeit with a wider range of outcomes for net ads a function of greater difficulty in forecasting the behavior of the newer cohorts, said the analyst.

The pet space is defensive with an inelastic demand, plus the headwinds from last year across the supply chain and wage/labor pressures have dissipated, with sell-side estimates poised for upside, in the analyst's view.

The analyst believes the stock is inexpensive for a double-digit top line grower with margin expansion. 

Price Action: CHWY shares are trading lower by 11.6% at $24.15 on the last check Thursday.