- Chewy, Inc. had another solid quarter, with margins improving.
- Growth is slowing but better than expected, with market share gains and auto-ship growing as a percentage of revenue.
- Analysts trimmed their targets over the last year, but the trend is over, and a reversal of sentiment is in play.
Chewy’s recent performance has shattered expectations by delivering a robust Q1, hinting at a promising outlook for the rest of the year. Despite a slight slowdown in growth, Chewy has exceeded anticipated performance, notably driven by substantial margin enhancements. The remarkable margin improvements prompted the board to initiate a $500 million share repurchase program, which signifies a strategic move to enhance shareholder value.
The share repurchase program, equal to around 6% of the market cap, aims to bolster the stock over time. However, the impact of this support remains uncertain due to the steady increase in share count resulting from share-based compensation. The potential effect of repurchases offsetting compensation in the short term hints at future growth. This move underlines Chewy’s financial strength and improving cash flow.
Chewy.com Strengthens Position in the Pet Market
Chewy.com’s recent quarterly performance reflected a growth of 3.1% in revenue, surpassing consensus estimates despite an expected slowdown driven by post-COVID market normalization. This normalization reveals a mid-single-digit growth rate among normalized markets, indicating Chewy’s continuous market share expansion.
The revenue growth was primarily propelled by a 9.6% surge in revenue per active member, offsetting a 2.1% decline in customers. Notably, the 6.4% increment in Autoship sales is significant, as it contributes to consistent cash flow, representing 77.6% of the net revenue.
Further, Chewy.com achieved favorable margin growth across the board, marking an improvement of at least 100 basis points in all comparisons. The substantial increase in gross, EBITDA, and net income margins led to a 200% growth in GAAP earnings and a 55% rise in adjusted EPS to $0.31 per share, surpassing consensus expectations by $0.11.
Chewy.com’s momentum, driven by transaction size and auto-ship growth, is anticipated to continue in FQ2 and beyond, prompting analysts to revise their targets upward. With analysts setting conservative targets, the potential impact on stock value could be substantial, leading to long-term shareholder value enhancement via the board’s decision to repurchase shares.
Raising the Bar: Analysts React to Chewy’s Earnings Potential
Prior to earnings, analysts tempered their expectations for Chewy stock, setting a notably low benchmark. Recent revisions place the stock at the lower end of the spectrum, essentially establishing a market floor. As the downward trend in projections halts, market stability is expected, with a possible sentiment reversal. Despite a 40% decrease in consensus targets from the previous year, analysts foresee a solid 25% upside potential, potentially leading the stock above critical resistance levels.
Market conditions align for a transformative shift for Chewy’s stock. Although short-sellers may cap gains initially, the minimal risk is outweighed by the bullish stance of institutions, whose ownership has surged to nearly 95% over four consecutive quarters. Market dynamics, coupled with strong technical indications including a gap-up opening and increased trading volume, position the stock to test higher price levels in the short term.
Source: Adapted from original article