Jefferies initiates coverage on Chewy, other pet stocks
Jefferies has initiated coverage on a slew of pet-related stocks, giving a “Buy” rating to Chewy (CHWY) and PetIQ (PETQ) while less optimistic about Bark (BARK), Petco (WOOF), and Freshpet (FRPT) and assigning a "Hold" rating to the latter three.
Yahoo Finance’s Seana Smith and Brad Smith take a closer look at this note and the driving factors for these businesses, including consumer spending on health-related pet care.
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Video Transcript
BRAD SMITH: Well, Jefferies is making some big calls on pet stocks this morning, initiating coverage on Chewy and PetIQ with a buy rating. Jefferies says Chewy has several growth opportunities and PetIQ's deal history offers upside potential for investors. But it's less optimistic about Bark, Petco, and Freshpet, slapping a hold rating on all of those latter three.
For more here, continuing to think about ultimately what these pet stocks really mean. I think it comes back to the consumer and how much they're spending more for, as [? Ozzie ?] would say, spending more for Sparky within the household, and perhaps just saying, you know what, we've got the things on a week in, week out basis that we'll purchase whether that be still walking into a brick and mortar or whether that be through one of the subscriptions. And then from there, it just becomes more about, OK, making sure that, obviously, the pet is healthy and that's where a lot of these businesses have leaned further into the health care side and tried to get a little bit more margin there.
SEANA SMITH: Yeah, Brad, you're exactly right there. And some of those drivers that Jefferies was talking about in this note, they mentioned pet health, the advertising business, also automation all seen as near-term drivers for this stock when it comes to Chewy. Now, in terms of why else they like this name, they're saying or at least making the argument that it's a little bit more insulated from some of the macro headwinds that we have been talking about.
So when you see some of the weakness playing out in the industry, consumers pulling back just a bit, they're saying that Chewy is one of the best positioned, the reason why we're seeing shares pop nearly 5% here in the premarket trading on the back of this bullish call here from Jefferies. But for Chewy, they're saying that 76% of the sales are from autoship customers, consumables not supplies making up the lion's share of sales just around 70%. So because of those reasons, because of those bullish factors, they see a name like Chewy outperforming. Even despite the fact that we could see consumers being a bit more budget conscious and pulling back on spending in other aspects of their life, they're going to still though be spending on Sparky like you said.
BRAD SMITH: I mean, look, we have a cat named Monkey that lives in our house.
SEANA SMITH: Monkey? [INAUDIBLE]
BRAD SMITH: So at the end of the day-- oh yeah. No, he's a big boy. But the replenishment rate on cat trees is very, very low at the end of the day, I would think.
SEANA SMITH: Well, how much do you-- like, have you ever cut back on-- you're a perfect person to ask, have you ever cut back on what you're feeding Monkey or--
BRAD SMITH: Like I said, Monkey is a big boy, we can't cut--
SEANA SMITH: Exactly, so there--
BRAD SMITH: You can't cut back on--
SEANA SMITH: --point proven.
BRAD SMITH: --what he's eating.
SEANA SMITH: --point proven along.
