The leading online retailer of pet food, supplies, and services, Chewy (CHWY), has had a rough 2023 so far, as evidenced by the fact that its shares are down more than 52% on a YTD basis. That woefully lags a 17% gain for the S&P 500 Index ($SPX) this calendar year.
Commanding a market cap of $7.47 billion, Florida-headquartered Chewy is the leader of its industry with a market share of about 40%, which is even higher than a behemoth like Amazon (AMZN).
This begs the question, does Chewy have the fundamental wherewithal to bounce back from this sharp YTD correction? Furthermore, given its positioning in a somewhat recession-resistant industry such as pet food and care, is the correction in a market leader like Chewy overdone? I think so - and in this piece, I'll discuss why Chewy remains well-poised for significant upside from current levels.
A Strong History of Surprise Profits
Chewy's latest results for the second quarter topped expectations, but the stock still sold off after its earnings report on Aug. 30.
Specifically, Chewy reported revenue of $2.78 billion for the quarter ended July, up 14.3% from the prior year. Adjusted EPS arrived at $0.15, and comfortably exceeded the consensus estimate. In fact, the company's bottom line has surpassed expectations in each of the past five quarters - and CHWY has a strong recent history of reporting surprise profits when Wall Street is expecting a loss.
Although active customers declined marginally to 20,367 (vs 20,490 in Q2 2022), net sales per active customer improved by 14.7% to $530.
Free cash flow ($101 million in Q2 2023 vs $1 million in Q2 2022) and net cash from operating activities ($159 million in Q2 2023 vs $49 million Q2 2022) also improved substantially from the previous year. Longer-term, Chewy's revenues have expanded at a 3-year CAGR of 22.3%.
Finally, the company's liquidity position remains stable, with a cash balance of $457.1 million and a total long-term liabilities balance of roughly $540 million.
Strong Growth Prospects
Chewy's future growth prospects appear to be quite impressive at the current juncture.
Forward revenue growth is pegged at 11.6%, compared to the sector median of 5.9%. The gap widens even further on the basis of operating profits, where CHWY's growth forecast is 77.2% - much higher than the sector median of 3.85%.
Likewise, Chewy's growth forecasts for forward free cash flow per share (244% vs 3.9%) and operating cash flow (42.8% vs 7.7%) are well above their respective sector medians.
Analysts Expect CHWY To Double From Here
Finally, analysts are expecting the company's share price to rise considerably from current levels.
Overall, analysts have a “Moderate Buy” rating for CHWY, with a mean target price of $36.63. This denotes expected upside potential of roughly 114% from current levels. Out of 20 analysts covering the stock, 8 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, 8 have a “Hold” rating and 1 has a “Strong Sell” rating.
