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Bull of the Day: Chewy, Inc. (CHWY)

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Chewy CHWY stock benefitted greatly from the stay-at-home economy during the height of the pandemic. The e-commerce pet store then got hammered in the early part of 2021, as Wall Street dumped covid high-flyers. Luckily for investors who missed out on that run, Chewy’s outlook remains strong and it’s starting to regain momentum.

Modern Pet Store Star

Chewy was founded roughly a decade ago as a pet store solution for the Amazon AMZN age. The company has spent the past ten years expanding its customer base and its portfolio in order to thrive for the next decade and beyond as more customers crave convenience and are willing to pay for it.

The firm sells pet food, supplies, treats, medications, and much more for a variety of animals. Chewy has found success by adding loyal pet owners to its ranks, with roughly 70% of sales coming from its Autoship business that allows people to have food and more delivered at regular intervals.

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Zacks Investment Research

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Investors should love the stability of these repeat customers who have come to love having products such as pet food and medicine delivered in regular intervals. People also clearly have the ability to order anything else available on Chewy whenever they want or need it.

Chewy last October launched a telehealth service called Connect with a Vet, which it has continued to improve. The company has also boosted its pharmacy offerings, and it has nationwide pet adoption services. All of these offerings should help it compete against the titans of e-commerce from AMZN to Target TGT, while also jumping to the forefront of pet-based telehealth, which has real legs far beyond the coronavirus.

Recent Quarter

Chewy added 43% more users in 2020 to close the year with 19.2 million, with revenue up 47% to $7.15 billion. This topped 37% sales growth during its first year as a public firm in FY19. The company then topped our Q1 estimates (period ended on May 2) in early June, with revenue and new active customers both up 32%. CHWY’s gross margin grew by 4.2% to 27.6%.

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Zacks Investment Research

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On top of that, the company posted positive adjusted earnings for the second quarter in a row. Chewy’s adjusted +$0.15 a share Q1 earnings crushed our estimate that called for a loss of -$0.02 a share and marked a big climb from the -$0.12 a share loss it posted a year ago.

Perhaps most importantly, Chewy closed the quarter with 19.8 million active customers, up 600K sequentially. “Further, retention rates remained steady as the 2020 cohort matures into their second year on our platform. Taking a broader view, over the past two years, we have increased our active customer base by 8.4 million or 75%,” CEO Sumit Singh said on the company’s earnings call.

Other Fundamentals

Chewy has blown away our bottom-line estimates in the trailing four periods. Analysts also raised their EPS estimates for fiscal 2021 and 2022 following the strong Q1 report. And there have been more positive revisions in the last seven days.

Looking down the road, Zacks estimates call for Chewy’s FY21 revenue to climb 26% or $1.8 billion higher to reach $9.0 billion, with it projected to add another $1.9 billion or 21% higher sales in 2022 to come in at $10.84 billion. Meanwhile, its adjusted FY21 earnings are expected to climb 33% to $0.12 a share, with FY22 set to skyrocket 179% to $0.33 a share.

Chewy’s positive earnings revisions, including the recent pop in its longer-term consensus estimates helps it land a Zacks Rank #1 (Strong Buy) at the moment. The stock also grabs an “A” grade for Growth in our Style Scores system and its Consumer Products–Staples is in the top 30% of our over 250 Zacks industries.

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Zacks Investment Research

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Price Movement & More

Chewy shares had soared over 300% from their March 2020 lows to their February highs of around $120 a share. CHWY got crushed when Wall Street sold high-flyers and pandemic winners. The stock, like many other growth-focused firms and tech giants like Apple AAPL, regained momentum around mid-May as Wall Street decided it was time to buy up their favorite long-term stocks at discounts.

CHWY has climbed 32% since May 13, right after it briefly fell into oversold RSI territory of 30. The stock has also surged in the last week, including a strong jump during regular hours Friday to close around $87 a share.

Chewy’s recent run has pushed it back above its 200-day moving average and it still trades 28% below its records, even as the market is back at fresh highs. Despite the rip higher, CHWY trades below overbought RSI (70) levels at the moment at around 60. And it trades at a 50% discount to its highs at 3.5X forward sales. All of this could give the stock plenty of room to run.

Bottom Line

Wall Street remains largely high on Chewy, with nine of the 14 brokerage recommendations Zacks has at “Strong Buys,” with only one below a “Hold.” Investors might want to take a bite out of CHWY since e-commerce was booming long before the pandemic and people utilizing delivery, especially automated delivery for essentials like pet food are unlikely to go back even as they return to their normal lives.

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