Chewy's Latest Analyst Ratings Raise Eyebrows: What's Brewing Behind the Pet Retail Giant's Numbers?

BofA analyst Curtis Nagle reiterated an Underperform rating on the American online retailer of pet food Chewy, Inc CHWY with a price target of $16. 

Nagle previewed Chewy’s 3Q23 earnings likely on December 6. For 3Q, the analyst projected revenue and EBITDA of $2.76 billion and $57 million vs. Street at $2.75 billion and $63 million. 

For 4Q, the analyst lowered estimates on weak 4Q BAC aggregated credit and debit card data and expected customer net adds to remain negative vs. Street’s expectation for a return to growth in 4Q. 

He now estimates 4Q revenue and EBITDA of $2.92 billion and $86 million, down from $2.95 billion and $94 million, and is now -0.4% and +3.4% vs. consensus.

Long-term positives include a return to historically strong industry trends, leveraging significant fulfillment investments, and continued expansion of the pet health segment. These factors could help achieve Chewy’s long-term EBITDA margins of 5% - 10% (vs. ~3% now). 

However, in the near term, Nagle remained cautious on industry trends and did not expect Chewy to outline new, material near-term revenue drivers or further significant cost reductions. 

Nagle sees potential for leverage in Chewy’s operating expenses, particularly within fulfillment costs, potentially worth several margin points. 

Analyzing past filings reveals a significant buildout of distribution infrastructure over the past five years to accommodate growth, including a tripling of facilities and recent automation upgrades. 

CNBC reports that the company targets 30% of revenues from Pet Health in the coming years compared to an estimated 9-10% now, likely making Pet Health a long-term growth driver. 

The analyst expects added focus on the segment during the upcoming Investor Day, with the company highlighting both the revenue opportunity and margin implications from initiatives in Chewy Pharmacy, vet services, and insurance.

The stock has lost 48.1% year-to-date.

Price Action: CHWY shares traded lower by 1.74% at $18.39 on the last check Tuesday.