Did Chewy IPO Just in Time for Slower Growth?

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Chewy Inc. (NYSE: CHWY) reported its most recent quarterly results after the markets closed on Thursday. Overall, investors did not seem thrilled with this first report as a public company, and some analysts took the opportunity to weigh in on the stock. The main concern seems to be slowing growth ahead.

Wedbush issued a Neutral rating with a $30 price target, implying downside of about 9% from the most recent closing price of $32.85. This was based on the firm’s belief that sales guidance implies solid growth but at a materially decelerating pace, while EBITDA guidance implies more modest improvement for the balance of the year than experienced in the first quarter of 2019.

In Wedbush’s view, the guidance appears conservative assuming a stable operating environment along with continued solid execution on the growth business and pharmacy rollout. Put another way, the deceleration embedded in guidance leaves room for additional investment in areas including customer acquisition and pricing if necessary, such as in reaction to aggressive promotions from Amazon, as recently witnessed.

Additionally, by planning to govern growth investments based on cash flow neutrality, the company appears set to continue aggressively investing for the long-term rather than strive to achieve sharply higher EBITDA margins beyond the near term.

Wedbush said that it was mildly disappointed that the company had elected not to provide quarterly EBITDA guidance, giving it more investment timing flexibility, and with very limited reporting of key metrics, it will be difficult to discern relative of new versus repeat customer economics.

This doesn’t seem like anything new, as analysts were not so bullish coming out of its quiet period earlier this month:

  • Morgan Stanley: Equal Weight with a $33 price target
  • RBC Capital Markets: Sector Perform and a $37 target
  • Jefferies: Hold rating and a $35 target price
  • Barclays: Equal Weight with a $32 target price
  • Nomura/Instinet: Neutral with a $36 price target

Shares of Chewy traded down about 1% Friday at $32.50, in a 52-week range of $30.78 to $41.34. The consensus price target is $36.70.


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