- Chewy, Inc. impresses with remarkable quarter results marked by improved margins.
- Despite a slowdown in growth, the company outperforms expectations, bolstering market share and auto-ship as a revenue driver.
- Analysts, who earlier tempered their outlook, are now witnessing a shift in sentiment, indicating a potentially favorable future.
Chewy (NYSE:) has defied odds by delivering a strong Q1 performance that hints at sustained momentum, ongoing vigor, and a promising uptick in shareholder value for the latter half of the year. While growth is decelerating, the results are surpassing projections, supported by significant enhancement in margins—highlighted by a noteworthy development that prompted the board to greenlight a share repurchase initiative.
With an unrestricted $500 million share buyback program now in place, comprising approximately 6% of the market cap, the move is poised to inject support into the stock over time, albeit its magnitude remains uncertain. Noteworthy is the 1.4% average increase in share count due to share-based compensation, likely to persist. Investors should anticipate repurchases offsetting initial compensation while growing gradually. Nonetheless, the board’s endorsement of the buyback underscores the flourishing health and cash flow of the business.
Chewy.com Strengthens Position as the Leader in the Pet Market
Chewy.com’s robust quarter saw a 3.1% revenue growth, surpassing consensus estimates despite the predicted growth slowdown. The dip is attributed to market stabilization post the COVID-19 upheaval; a key takeaway is that normalized markets are steadily expanding at a mid-single-digit rate, with Chewy claiming a larger market chunk.
The revenue surge is attributed to a 9.6% uptick in revenue per active member, although offset by a 2.1% customer decline. Vital details include a 6.4% boost in Autoship sales and a significant 240 basis point enhancement in top-line contribution. Autoship’s significance stems from its recurrent revenue nature, offering reliable cash flow constituting 77.6% of the net.
Margins are a bright spot, with the company widening margins by at least 100 basis points across all comparisons. Marks include a 130 bps surge in gross margin, a 170 bps uptick in adjusted EBITDA margin, and a 150 bps rise in net income margin. Consequently, GAAP earnings soared by 200%, with adjusted EPS jumping by 55% to a commendable $0.31 per share, outshining consensus by $0.11.
While Chewy.com refrains from giving guidance, it showcases momentum with the transaction size and Autoship growth likely to persist into FQ2 and beyond. This should prompt analysts to revise their targets as they had set them conservatively. The pivotal question looms on the impact of this news, which could be substantial. The decision to endorse share buybacks marks a pivotal moment for Chewy, heralding a path toward enhancing long-term shareholder value.
Analysts Reset Expectations for Chewy Ahead of Earnings
Analysts have recalibrated their outlook for Chewy’s stock before earnings, albeit setting the bar exceedingly low. Recent revisions have placed the stock at the lower end of the spectrum, effectively establishing it as the market’s baseline. Should the trend of downward revisions halt, sustaining the baseline would be unchallenging, potentially paving the way for a reversal. While the consensus target has dipped nearly 40% over the past year, it still presents a substantial 25% upside, with analysts potentially revising their targets upwards. In such a scenario, the stock could transcend critical resistance at $25 and ascent to the $40 threshold.
Market dynamics indicate ripe conditions for a complete stock turnaround. There’s a slight risk of short-sellers anchoring gains at $25, though this is minimal. The 5% short interest is marginally elevated, not reflecting substantial bearish sentiments. Conversely, institutional investors have maintained a consistent purchasing trend for four consecutive quarters, amassing ownership to nearly 95%, a hallmark of bullish conviction.
The technical outlook is optimistic, as the market commenced with a significant upward gap and sustained the momentum with substantial volume. In this context, the market has the potential to hit $22.50 imminently and retest $25 within the week.