Chewy Is Gobbling Up The Market And Spitting Out Profits

The Chewy Growth Story Is Far From Over 

We have liked Chewy, Inc (NYSE: CHWY) from the moment the company went public. The stock is truly the best-in-breed in a rapidly growing segment that is supported by not one but two secular trends. On one hand, is eCommerce which by itself is growing at a high double-digit pace and on the other is pet care. Pet ownership is growing worldwide and compounded by the ever-increasing humanization of our pets. The more we love our animals the more money we spend on them … and it shows in Chewy’s results. 

“Years of preparation and focus have positioned us as the Internet’s preeminent neighborhood pet store and a leading pure-play e-commerce company in the pet space. We look forward to a future marked by ongoing innovation and to winning customers’ hearts and minds as we grow to become the most trusted and convenient online destination for pet parents (and partners) everywhere," said Sumit Singh, Chief Executive Officer of Chewy.

Chewy Blows Past Robust Consensus Figures And Raises Guidance 

Chewy reported one of the strongest quarters we’ve seen for the Q4 reporting cycle. The company delivered a 51.1% increase in YOY revenue that beat the consensus by 460 basis points. Revenue gains were driven by new customer acquisition as well as organic growth to the tune of +3% for its active customers. Auto-ship, the company’s recurring revenue stream, grew 46% YOY and accounted for 68.2% of sales. 

Moving down the report the details only get better. The company was able to leverage its revenue growth and widen margins. The gross margin widened by 300 basis points from last year to hit 27.1% and outpace the consensus by 200 basis points. At the operating level margins improved by 500 basis points to produce a surprise 1.0% margin and profit. On the bottom line the GAAP $0.05 beat by $0.15 while the adjusted $0.11 beat by $0.20.

As good as the Q4 results are, it was the guidance that really got the market’s attention. The company is expecting Q1revenue in the range of $2.11 to $2.13 billion versus the consensus of $2.07. This is 3.5% to 4.5% sequential growth and 30% to 32% YOY growth. The pace of YOY growth is falling but that is to be expected, the company’s comps are getting harder and harder but sequential growth should be steady. Regardless, the analysts are expecting this company to grow at a high double-digit pace for the next several years at least and are already upping their estimates in the wake of the Q4 results. 

The Analysts Like What They See 

The analysts were as impressed with Chewy’s results as we were and are already upping their targets. Morgan Stanley, Wedbush, and Jeffries all came out with positive comments and higher price targets for the stock. Jeffries is the high-water mark of these three at $105 but not the highest on Wall Street. The consensus target is $88 but the high-price target is $121 and held by Credit Suisse. The sentiment among today’s comments is that Chewy is outperforming expectations by a year or more and supported by strong trends in the industry. 

Analyst Nat Schindler, Bank of America: "We see plenty of positive signs for longer term growth trends, with creation of new pet profiles up 35% y/y in 2020 for puppies and kittens signaling higher staple consumption of food, hard goods and healthcare services over time. The new cohorts are also showing higher repeat order rates, and higher average value per order (on repeats). Pharmacy operations topped the $500M revenue goal set last quarter and we view the high-margin healthcare vertical as one of the growth drivers in 2021."

The Technical Outlook: Chewy Spikes On Earnings And Outlook 

Shares of Chewy spiked more than 13% in early premarket trading to not only confirm support at the recent bottom but the reversal in price action as well. Price action is now above the short-term EMA where we can expect short-term investors and speculators to take over. In the near-term, we expect to see CHWY retest the recent highs, in the short to long-term we expect to see CHWY break out to new highs and move up to the $160 region.