Chewy's Market Penetration Set to Grow in Toronto: Potential for 2-3 Million New Customers, Analyst Predicts

Roth MKM analyst David Bellinger reiterated a Buy rating on the shares of Chewy Inc CHWY with a price target of $52.

The analyst reiterates Chewy as the top Pick following better-than-expected Q1 results. Overall year-on-year growth in unique customers through mid-June indicates a modest improvement from Q1 to Q2.

The analyst’s interaction with the management indicates net actives landed comfortably within internal expectations for Q1 and keep CHWY on the path for positive customer growth in 2H23.

The company’s indication that revenue growth did not decelerate over the later stages of Q1, at odds with trends seen at Petco Health and Wellness Company Inc WOOF suggests further share gains as customers shift to the more economically priced and digitally inclined Chewy platform, noted the analyst.

Recent commentary from key delivery partner FedEx Corp FDX indicated that the slowdown in internet retail sales growth is “probably complete” at this point, indicating a completion for e-commerce reset, remarked the analyst.

An inflection point to the net customer adds emerging in 2H23 or potentially earlier, which has proven the key metric for investors to get more positive on the name.

The analyst sees expanding margin profile as new, adjacent businesses ramp (sponsored ads, healthcare, etc.) and start-up costs begin to fade, all while the benefits of automation begin to flow into the model.

Chewy brand will enter the greater Toronto market in the coming months, and its 7 million plus population and the analyst’s math imply 2-3 million incremental customers north of the border, assuming similar market share achievement as in the U.S. business.

Price Action: CHWY shares are trading higher by 1.24% at $39.18 on the last check Friday.