Autoship Success And Vet Care Expansion Will Propel Revenue Growth And Enhance Profitability

Key Takeaways

• Expansion in health care services and Chewy Vet Care clinics taps significant market, potentially boosting future earnings and customer acquisition.
  
• Growth in the sponsored ads business and mobile app adoption could enhance gross margins and customer engagement, improving profitability.
  
• Chewy's revenue stability is threatened by dependency on core programs, increasing competition, and uncertain returns from new ventures and international expansions.

Catalysts

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

• The continuous growth in the Autoship program, representing 80% of net sales and driving customer loyalty with increased visibility and predictability, suggests a positive impact on future revenue.
  
• Expansion of Chewy's health care services and Chewy Vet Care clinics taps into a significant $25 billion total addressable market, potentially boosting future earnings and revenue streams due to increased customer acquisition and cross-category sales.
  
• The early success of the Chewy+ paid membership program, showing increased order frequency and higher cross-category penetration compared to non-members, could enhance future revenue through greater customer engagement and retention.
  
• Increased focus on expanding the mobile app adoption is expected to drive higher customer repeat rates and order values, potentially improving net margins due to the efficiency of direct app-based marketing.
  
• The growing sponsored ads business, projected to reach 1% to 3% of future net sales, could enhance gross margins by adding a high-margin revenue stream, impacting profitability positively.

Chewy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chewy's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.5% today to 3.0% in 3 years time.
• Analysts expect earnings to reach $430.2 million (and earnings per share of $1.02) by about January 2028, up from $401.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.5x on those 2028 earnings, up from 36.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Chewy Future Earnings Per Share Growth

Risks

• Dependence on the success of the Autoship program, which represents a significant portion of net sales, highlights potential risks if customer preferences shift or if competition develops similar programs, potentially impacting revenue stability.
  
• Increasing competition and the need for continued marketing investment, as indicated by heightened advertising and marketing expenses, could pressure net margins if customer acquisition or retention costs rise without a corresponding increase in revenue.
  
• New ventures such as vet clinics require capital investment and have uncertain returns. If these initiatives underperform, they could drag on overall profitability, affecting earnings.
  
• Expansion into international markets like Canada is still small and immaterial to overall operations, indicating potential risk if this expansion does not scale effectively or align with growth expectations, impacting future revenue streams.
  
• High reliance on the mobile app for future revenue growth might not fully materialize if user adoption or engagement stagnates, impacting anticipated improvements in marketing efficiency and overall earnings.

Valuation

• The analysts have a consensus price target of $37.32 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 $42.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.1 billion, earnings will come to $430.2 million, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of $35.77, the analyst's price target of $37.32 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.