Chewy Grows with Innovation and Remains Fairly Valued, Says Analyst
The growing momentum of E-commerce across the world was fueled by the COVID-19 pandemic. As per the U.S. Census Bureau’s most recent data, U.S. E-commerce sales grew 39% year-over-year to $196.7 billion in the first quarter of 2021 and accounted for 13.4% of overall U.S. retail sales.
The surge in buying-from-home has not just benefitted E-commerce giants like Amazon (NASDAQ: AMZN), but more niche players, including Etsy (ETSY), Chewy (CHWY), and Wayfair (W), have also gained. In this favorable growth environment for E-retailers, pet adoption and pet owners' willingness to spend more on their pets led to escalated demand for pet food and wellness products and services.
According to a Grand View Research report, the global pet food market was valued at $83.02 billion in 2018 and is expected to grow at a compounded annual growth rate (CAGR) of 4.5% through 2019 to 2025.
Therefore, given Chewy’s “compelling value proposition, product innovation, and the predictable nature of about 70% of sales,” Needham analyst Anna Andreeva initiated coverage of the U.S. online retailer of pet food, pet supplies, and medications with a Hold rating.
The analyst believes the recent collaboration with Freshpet (FRPT) has exposed Chewy to the freshly prepared pet food space as well. Therefore, Andreeva estimates that sales from the Freshpet partnership and Chewy’s premium proprietary brand, Tylee’s, together can inflate the company’s TAM (total available market) by $600 million to $1 billion. Notably, Freshpet is an established manufacturer of natural fresh meals and treats for dogs and cats.
Furthermore, “with its high-touch customer care model,” Chewy is expected to be the pioneer in this category soon, with the new fresh products likely to be shipped in the coming quarters and initially be commercialized across three regions covering about 60% of Chewy’s client base.
Andreeva considers durable U.S. pet market tailwinds along with TAM expansion as strong opportunities for the company. Additionally, the company’s innovative products that transformed it from a provider of food and treats, to providing a multidimensional customer experience including food, treats, personalized accessories, health care, and services seem encouraging.
From a financial perspective, the analyst believes that the company is moving towards its long-term gross margin target of 25% - 28%, displaying a 5-year average of 20.7% preceding 2020, and 25.5% in 2020. Rising market share in higher-margin verticals, pricing stability in the controlled promotional environment during the pandemic, and normalization of freight & logistics costs were cited as reasons for the expansion.
Furthermore, according to Andreeva, although acceleration in gross margin gains by 420 bps was experienced in 1Q21, the same is likely to moderate for the remainder of the year on rising freight & logistics charges as well as increased activity in promotions.
Notably, the analyst estimates gross margin to come in at 27.2%, up 170 bps year-over-year in 2021, while at 27.9%, up 70 bps for 2022. (See Chewy stock charts on TipRanks)
Overall, the analyst commented, “With impressive speed of innovation and high quality of execution, we see Chewy as well positioned in the durable pet space to gain new customers, drive retention through its subscription program and capture greater wallet share through expanding products and services as the company strives to be a one-stop destination for all pet needs. However, new customer ads slowed to below a pre-Covid level in 1Q21, and company faces a challenging near-term operating environment that includes higher spending on wages & benefits, and supply shortages that began in 2020.”
Therefore, considering the shares are fully valued at current levels, the analyst assigns a Hold rating.
On TipRanks, Chewy has a Strong Buy analyst consensus rating based on 7 Buy and 2 Hold ratings. The average Chewy price target is $110.38, representing 12-month upside potential of 35.9%.
TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on Chewy, with 9.4% of investors maintaining portfolios on TipRanks increasing their exposure to CHWY stock over the past 30 days. Shares have increased 56.5% over the past year.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your analysis before making any investment.