Chewy Earnings: Retailer Turns a Corner on Profitability and Customer Growth

Key Morningstar Metrics for Chewy

• Fair Value Estimate: $29.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Chewy’s Earnings

Chewy CHWY posted solid second-quarter results, with strong margin performance and modest sequential growth in active customers driving a more than 15% intraday surge in the share price after the release. Up more than 25% in 2024, the stock now looks fairly priced, as the market appears to have come around to our views regarding the petcare retailer’s attractive long-term competitive position and margin expansion prospects. As we digest earnings, we expect to raise our $29 fair value estimate by a low-single-digit percentage due to time value and faster-than-expected margin expansion.

Net sales of $2.86 billion and adjusted earnings per share of $0.24 topped our respective estimates of $2.84 billion and $0.06, thanks to ongoing strength in the subscription business (78.4% of quarterly sales, growing at a 6.9% annual rate) and growth in the high-margin ads and healthcare segments. The 5.1% adjusted EBITDA margin comfortably topped our 4.1% forecast, and we expect to move our 4.3% full-year outlook toward the high end of management’s revised 4.5%-4.7% guidance (up 40 basis points at the midpoint).

We expect Chewy will see sales growth reaccelerate in 2025 with a skew toward the second half, when we project an inflection in US consumption spending, before returning to 9%-10% growth by 2026. Expansion of its higher-margin businesses remains a long-term profit driver, while operating leverage in fulfillment services for core retail leaves us optimistic that Chewy can achieve its long-term targets for 10% or better adjusted EBITDA margin. From a macro perspective, improving pet adoption trends are encouraging. While we believe the second-quarter earnings report validates management’s margin outlook, investor focus will likely shift toward Chewy’s ability to return to active customer growth and the high-single-digit sales growth outlined in its December 2023 investor day.