4 Chewy Analysts Express Concerns Top-Line Challenges, How Pet Adoption Factors In

Chewy Inc CHWY reported third-quarter 2023 results Thursday, sending the stock price down 2% in aftermarket trading.

The Florida-based company also cut 8% of corporate employees in November.

• Needham analyst Anna Andreeva reiterated a Buy on the company and cut the price target from $45 to $20.
• RBC Capital analyst Steven Shemesh maintained Chewy with an Outperform and lowered the price target from $44 to $35.
• Piper Sandler analyst Peter J. Keith maintained a Neutral rating and a $21 price target.
• Morgan Stanley analyst Lauren Schenk remained Overweight with a price target of $27.

Here's a Q3 breakdown:

• Q3 revenue of $2.74 billion — up 8.2% on a year-over-year, missed estimates of $2.76 billion.
• Q3 EPS of 15 cents beat estimates for a six-cent loss.
• 24% of business that's non-auto-ship is off on forecast accuracy ($50 million) as trade-down from newer cohorts that started in July and August is continuing
• Auto-ship (76% of sales) remains a resilient aspect of the model (penetration up 300 bps, growing 5% faster than total sales year-to-date).
• Pharmacy is a growth driver.

Management is prepared for a downside scenario if demand moderates further in fiscal year 2024. The analyst lowered estimates while Cyber 5 promo cadence was slightly steeper Y/Y, the environment in pet looks "broadly rational" (pet space grew low single digit in 3Q23, with modest improvement in relinquishment sequentially), and $957 million in cash at the end of 3Q23 (11% of market cap) should help provide support.

Andreeva expects Q4 revenue of $2.79 billion and EPS of 8 cents.

CHWY delivered a ~30% adjusted EBITDA beat and reaffirmed FY23 margin guidance, but the top line continues to be an issue, which will likely hold back shares (4Q implied guidance lowered from +8.5% to +3.0%). Focus shifts to the company's investor day, where he expects to hear more about the opportunity in pet health and international (unlikely to be a positive catalyst for shares given top-line overhang). 

Shemesh expects Q4 revenue of $2.79 billion (prior $2.92 billion) and EPS of 13 cents.

While Q3 EBITDA showed a nice upside, Q3 revenue missed estimates, and Q4 revenue was guided below expectations at +3% at the midpoint (vs. consensus at +8%).

Revenue trends are plagued by declining pet adoptions (pulling down active customers), disinflation in pet food, and weakness in the ~25% of sales that aren't subscriptions. Unfortunately for CHWY, there is no end in sight to these headwinds.

Margins are being managed relatively well considering the softening sales trend, and CHWY will unpack more about its long-term gross margin drivers at its analyst day next week.

With an uninspiring top-line outlook and a somewhat confusing conference call, CHWY is in much need of an analyst day to help reframe the long-term sales and margin drivers.

Keith expects Q4 revenue of $2.79 billion and EPS of $(0.01).

Macro continues to be an overhang on growth, with CHWY guiding to just ~3% Y/Y revenue growth in the fourth quarter. Despite that, profitability remains a bright spot as CHWY continues to deliver margin expansion despite macro headwinds. All eyes are now on the analyst day next week.

Schenk expects Q4 EPS of $(0.03).

Price Action: CHWY shares traded lower by 1.72% at $18.89 on the last check Friday.

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