Another Analyst Gets Bullish On Chewy

A Double-Tailwind Is Fueling Growth

Another sell-side analyst has gotten bullish on Chewy, Inc (CHWY) and, frankly, I am not surprised. Chewy is an online retailer of pet care products and positioned at the nexus of two powerful trends. On the one hand, there is a surge in online shopping and eCommerce. Expected to grow at a double-digit compound annual growth rate for the next five years eCommerce is a largely untapped market.

On the other, there is secular growth within the pet care industry. Not only are more and more people keeping pets for companionship there are spending more and more money on the privilege. The global pet care market, grooming supplies medicine and food, is expected to grow at a 3.5% CAGR and top $250 billion by 2025. Together, these trends provide a double-tailwind that is fueling growth at Chewy, Inc.

Two Upgrades In As Many Weeks

RBC Capital upped Chewy’s rating to Outperform from neutral citing a number of factors we already knew. Analyst Mark Mahoney says the company has a “highly favorable” risk/reward profile due to expanding revenue and margins. According to him, this year will be an inflection year for the company because customer growth remains strong. Customer growth is important for this company for two reasons.

The first is obvious, more customers mean more revenue. In Chewy’s case, it also means more recurring revenue or revenue that can be counted on in future quarters. One of Chewy’s most attractive features is the AutoShip feature that allows users to schedule regular shipments of food and medicine. Chewy has a high conversion rate when it comes to AutoShip and that means highly predictable and stable revenue that can withstand market cycles. As of last report, AutoShip was more than 70% of total revenue and growing.

Wedbush’s Seth Basham is equally bullish on Chewy citing its competitive advantage. He expects the CAGR for the online pet care industry to grow about 22% over the next four years and for Chewy to take half the action. While Chewy has competitors but none are at the same scale or scope and that is their downfall. Closest competitors (that aren't Amazon) Petmed Express (PETS) and PetIQ (PETQ) are too focused on health and wellness, their offerings are mostly medicine and health-related products with only a smattering of other products while Chewy is a full-blown petcare superstore.

Chewy Dominates The Hottest Categories In Pet Care

The hottest category in pet care by far is food. All pets need food and the trend is shifting to premium and specialty brands. The total amount of petcare spending in the U.S. in 2019 is an estimated $75 million with fully 42% of that going to food. The next hottest category is vet care and that commands only 25% of the market although both are growing at double-digit rates.

Chewy has been pushing into the private-label space with a focus on premium and specialty foods. Private-label brands saw the most growth of any category over the last year, up 60%, with much of that centered on the food segment. In addition, the company’s use of smart marketing technology has resulted in a high conversion rate for medicines, people who come to buy food stay and get their medicine too, a vertical with much higher margins.

CEO Sumit Singh

“As a result of high-quality assortment growth and continued focus on smart site merchandising, Chewy private brands sales grew more than 60% year-over-year in our third quarter or 1.5x our overall net sales growth. These private brands now enjoy a double-digit share of sales at Chewy in several growing subcategories such as Frozen Foods, jerky treats, and natural bones and chews.”

The Technical Outlook: A Fight Is Brewing Between The Bulls And The Bears

Today’s upgrade sparked a 5% jump in Chewy’s share prices that put the stock at a new 6-month high. The bad news is resistance was present and sent the share price back below the point of break out. Resistance at this level, near $32, is likely to be strong for one reason; this level is consistent with the January high and the price-level post-IPO holdouts used to cut their losses.

In the nearer-term, Chewy stock price may fall back to stronger support before they move higher again. Support is likely to be found near the $29.25 level or just below. Price action may also move sideways within the range of resistance at $32 and support at the short-term moving average and/or my uptrend line.

Longer-term, I expect to see Chewy consolidate within the current range before moving up to set new highs. The resistance level at $32 is my trigger point, I expect to see fierce action between bulls and bears when it is next touched. It looks to me like the baseline of a bullish Head & Shoulders pattern, one that could send share prices up by $10 or nearly 33% once the bears capitulate.