Low active customer growth forecast may limit revenue expansion and underscore potential challenges in attracting significant new users.
Substantial marketing investments and flat pet adoption trends may pressure earnings and top-line growth, particularly if customer acquisition remains stagnant.
Chewy's strategic customer acquisition, diversified revenue initiatives, and solid cash flow indicate strong potential for future growth and profitability.

About Chewy

Engages in the e-commerce business in the United States.What are the underlying business or industry changes driving this perspective?

Chewy's expectation of active customer growth in 2025 being in the low single digits suggests potential underperformance in attracting significant new users, which could limit revenue expansion.
Despite the company's initiatives like automation and Chewy Vet Care Clinics, these are still ramping up and may not provide substantial revenue contributions in the near term, potentially impacting growth forecasts negatively.
Given the competitive landscape, the slowdown in gross margin improvement, especially relative to expectations, indicates potential challenges in maintaining profitability levels, impacting net margins.
The marketing spend for 2025 still being substantial (6% to 7% of net sales) amid muted pricing inflation suggests the company needs significant investments to maintain customer acquisition, which could compress earnings margins if customer add rates do not materially improve.
With the industry pet adoption trends remaining largely flat and the potential decline in price inflation across pet categories, Chewy could face pressures on top-line growth projections, impacting future earnings potential.

Chewy Earnings and Revenue Growth

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on Chewy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming Chewy's revenue will grow by 6.5% annually over the next 3 years.
The bearish analysts assume that profit margins will shrink from 3.2% today to 2.7% in 3 years time.
The bearish analysts expect earnings to reach $398.7 million (and earnings per share of $0.99) by about August 2028, up from $388.2 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 46.9x on those 2028 earnings, up from 43.5x today. This future PE is greater than the current PE for the US Specialty Retail industry at 19.0x.
Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

Chewy's growth in active customers, reaching over 20.5 million by the end of fiscal year 2024, indicates strong customer retention and acquisition strategies which could support future revenue growth.
The company's Autoship program, which represented over 80% of Q4 net sales, provides a predictable, subscription-like recurring revenue stream that could stabilize revenues even if market conditions fluctuate.
Chewy has demonstrated increasing profitability, with an adjusted EBITDA margin reaching 4.8% for fiscal year 2024, signaling effective cost management and potential for future margin expansion.
Chewy's expansion into new initiatives such as the Chewy Vet Care Clinics and sponsored ads business indicates a potential for diversifying income streams and further driving revenues.
The company’s strong free cash flow, exemplified by a record $452.5 million in fiscal year 2024, allows for reinvestment into strategic growth initiatives and returning capital to shareholders, potentially enhancing future earnings.

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for Chewy is $36.68, which represents two standard deviations below the consensus price target of $46.1. This valuation is based on what can be assumed as the expectations of Chewy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.0, and the most bearish reporting a price target of just $33.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $14.6 billion, earnings will come to $398.7 million, and it would be trading on a PE ratio of 46.9x, assuming you use a discount rate of 8.1%.
Given the current share price of $40.93, the bearish analyst price target of $36.68 is 11.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Flat Pet Adoption Trends And High Costs Will Hamper Prospects

Shared on07 May 25Fair value Increased 6.58%