Can Chewy Fetch Double Digit Gains in 2023?

Key Points

• Most of Chewy revenues are non-discretionary spending since pets also need staples like consumers.
• Steady, consistent, and predictable cash flow from Autoship recurring deliveries has grown to represent 73.3% of revenues.
• It’s protecting and growing margins by passing on cost inflation to the customers and bolstering its private label brands Tylee’s and Vibeful.
• Exclusive expansion of insurance and wellness offerings with Lemonade will launch in spring 2023.
• CHWY stock has a 27% short interest.

Online pet products and services retailer Chewy, Inc. NASDAQ: CHWY stock has nearly doubled off its May 23, 2022, low of $22.22. The pandemic helped accelerate e-commerce usage and pet ownership, which are Chewy's wheelhouse. Once a pet is adopted or acquired, it has essential needs, including food, medicine, and grooming supplies. Gathering these basic supplies can be a tedious chore to handle every month. Chewy has simplified this with its Autoship service that will automatically ship chosen products to pet owners regularly.

Autoship has been an anchor for the Company regarding consistent and stable cash flow. Customers are incentivized to use Autoship with deep discounts. It also whiteboards its PracticeHub platform for veterinarians to provide an e-commerce marketplace solution to grow practice revenues from its customers. Autoship guarantees recurring business from customers. The Company has teamed with Lemonade, Inc. NASDAQ: LMND to expand its CarePlus insurance and wellness programs. The Company expects to launch its nationwide Lemonade offerings in spring 2023. Chewy has proven that

Non-Discretionary Spending

Just as consumers need staples and essential items from grocery stores, pets need their form of crucial medications and food. Chewy notes that 83% of its revenues come from non-discretionary products like pet food and health items, while discretionary items like toys are declining (-5%) YoY.

Consumer staples stocks have been good performers this year, but pet staples stocks haven't been performing as well, as Petco Health and Wellness Company, Inc. NASDAQ: WOOF shares are down (-49%) for the year, Wag! Group Co. NASDAQ: PET is down (-78%), and PetMed Express. Inc. NASDAQ: PETS is down (-28%) for 2022.

Chewy has data that indicates how Autoship customers spend $400 annually in year two and up to $900 annually in year 4. Chewy is also expanding its private label products under its brand Tylee's, and pet wellness brand Vibeful. In addition, it continues to build its Chewy Health eco-system with services like Connect With a Vet telehealth service and CarePlus pet insurance plans.

Profit Surprise

Chewy released its fiscal Q3 2022 earnings ending October 2022 on Dec. 8, 2022. The Company reported an earnings-per-share profit of $0.01 versus consensus analyst estimates for a loss of (-$0.06), a $0.07 beat. Revenues grew 14.5% year-over-year (YoY) to $2.53 billion, beating consensus estimates for $2.46 billion. Autoship sales rose 18.8% YoY to $1.86 billion, making up 73.3% of total sales. Gross margins expanded 200 bps to 28.4%. The Company ended the quarter with 20.5 million active customers, up 9% over Q3 2019.

Chewy CEO Sumit Singh commented, "Chewy's third-quarter results showed accelerating double-digit topline growth, sustained gross margin expansion, and solid free cash flow generation. The fact that we are simultaneously driving topline growth and expanding margins is proof of our ability to get big fast and fit fast, regardless of the macro environment."

Upside Guidance

Chewy issued upside guidance for Q4 2022 revenues to come between $2.63 billion and $2.65 billion versus $2.63 billion. Chewy expects full-year fiscal 2023 revenues of $10.2 billion to $10.4 billion versus $9.95 billion consensus analyst estimates. CEO Singh summed up why Chewy is a recession hedge, "The operating environment remains dynamic and evolving. What hasn't changed is how much pet parents value their pets' enduring companionship, and this emotional bond sustains the pet category through all phases of the economic cycle."

Rising Price Channel Emerges

The weekly candlestick chart on CHWY stock illustrates a new rising channel that formed after making a swing low in October 2022. Additionally, the stock held the weekly market structure low (MSL) buy trigger at $29.79 as it proceeded to form higher highs and higher lows into its Q3 2022 earnings report.

The weekly 20-period exponential moving average (EMA) has now crossed back up through the weekly 50-period MA offering rising support at $39.40. The weekly 50-period MA support sits at $38.76. Trading volume remains elevated, with selling being absorbed in the rising price channel. The weekly stochastic has been oscillating higher and continues up towards the 80-band.

A sloppy weekly seed wave will trigger a break of the double top at $51.57, setting up potential reversal zones (PRZs), which also act as price targets based on Fibonacci (fib) extensions. For example, the 1.27 fib target is $59.88, followed by the 1.44 fib target at $64.15 and the 1.618 fib target at $70.19.

Each of these fib targets is a potential reversal area to be aware of, which is no assurance the stock will continue to the next fib target. If CHWY falls below the rising price channel lower trend line, then pullback supports sit at the $37.05, $33.55, $31.89, $29.79 weekly MSL trigger and $26.47