Vet Care Clinics And New Ad Platform Will Drive Success

Key Takeaways

• Strategic expansions and 1P ad platform enhancements aim to increase revenue and customer engagement, positively impacting gross margins and long-term profitability.
  
• Innovation and improved marketing are set to boost customer growth, conversion rates, and net sales, supporting top-line revenue expansion.
  
• High reliance on the Autoship program and modest customer growth present risks to revenue stability, while expansion efforts face uncertainties impacting diversification and profitability.

Catalysts

Engages in the pure play e-commerce business in the United States.

• Chewy's strategic expansions, such as opening new Chewy Vet Care Clinics, are expected to further penetrate the $25 billion vet services market, likely increasing revenue and active customer engagement in 2025 and beyond.
  
• The migration to a 1P ad platform allows for enhanced advertising capabilities, including off-site ads and new content formats like video, which could grow the sponsored ads business up to 3% of total enterprise net sales, positively impacting gross margins.
  
• The company's increased focus on innovation, such as the Chewy+ membership and mobile app improvements, is driving new customer acquisition and higher conversion rates, enhancing both revenue growth and net sales per active customer (NSPAC).
  
• Active customer growth has reached an inflection point, with expectations for continued growth in 2025 due to improved marketing strategies and customer acquisition channels, positively affecting top-line revenue.
  
• Chewy is on a path to achieving its long-term target of a 10% adjusted EBITDA margin by continuing to expand gross margins and achieve SG&A leverage, thereby improving overall profitability and shareholder value.

Chewy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chewy's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.3% today to 3.0% in 3 years time.
• Analysts expect earnings to reach $435.6 million (and earnings per share of $1.06) by about April 2028, up from $392.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $500 million in earnings, and the most bearish expecting $383.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.2x on those 2028 earnings, up from 35.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 5.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Chewy Future Earnings Per Share Growth

Risks

• There is risk associated with the high level of reliance on the Autoship program, which represents over 80% of sales. If consumer preferences change or if there are disruptions in subscription services, there could be a negative impact on revenue stability and top-line growth.
  
• The growth in active customers is modest, with year-over-year improvements after eight quarters of decline. Slow growth in customer acquisition poses a risk to revenue expansion and long-term market share.
  
• The long-term adjusted EBITDA margin goal of 10% may be optimistic if there are unforeseen cost increases or if expected efficiencies from automation and new business ventures do not materialize, potentially affecting earnings and profitability.
  
• Projected low inflation raises concerns about limited pricing power, which could affect gross margins and overall profitability if cost pressures arise or competitive pricing leaves little room for margin growth.
  
• Dependence on expansion into new areas such as Veterinary Care Clinics (CVC) and sponsored ads comes with uncertainties. If these initiatives do not perform as expected, there could be adverse effects on revenue diversification and margin improvement.

Valuation

• The analysts have a consensus price target of $39.869 for Chewy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.5 billion, earnings will come to $435.6 million, and it would be trading on a PE ratio of 40.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $33.48, the analyst price target of $39.87 is 16.0% higher.
• 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.