Chewy Earnings: Market Likes Repurchase Program and Profit Improvements; Shares Still Cheap

Narrow-moat Chewy reported strong first-quarter results, with growth in its healthcare business driving a modest revenue beat while progress in its sponsored ads business and the mix shift toward higher-margin healthcare drove strong margin performance. While the firm maintained its guidance of 4%-6% sales growth for the full year, it increased its adjusted EBITDA margin prognosis by 40 basis points at the midpoint, driving our planned mid-single-digit percentage increase to our $27 fair value estimate. Shares continue to look cheap, despite a 26% surge in intraday trading. We posit that the strong market reaction was reflective of the firm's inaugural $500 million share repurchase program and unnecessarily pessimistic forecasts regarding the firm's ability to execute on its investor day road map.