Shares of online pet products retailer Chewy (NYSE:CHWY) are jumping conspicuously higher on an otherwise slow Tuesday on Wall Street. Amplifying the positive sentiment is fresh analyst coverage of CHWY stock accompanied with a “buy” rating. For both Chewy and the broader pet products industry, the assessment symbolizes a respite from an otherwise dour environment.
According to Seeking Alpha, Jefferies analyst Kaumil Gajrawala believes that Chewy’s pure-play pet e-commerce business offers “several growth and margin levers.” In the near term, pet health, advertising initiatives and automation protocols represent viable drivers for the company. However, Gajrawala acknowledges that ongoing cost pressures may “create a fluid timeline” in terms of meeting benchmark objectives.
At the same time, the analyst says that CHWY stock could be somewhat insulated from certain macroeconomic pressures. For daring investors, Gajrawala believes Chewy could create an upside opportunity:
“High inflation is causing trade down in food and discretionary is still weak. Chewy indexes to high income groups, ~76% of sales are from Autoship customers, and consumables, not supplies, make up the lion’s share of sales (70%). Despite below-algo F24 growth (+5% est. vs. +HSD%), on muted pricing and slower pet household formation, pockets of weakness in the industry are less likely to impact Chewy.”
Notably, Jefferies models for Chewy’s fiscal 2024 sales to gain 5% and eventually grow by more than 8% in fiscal 2027.
CHWY Stock Pops Amid a Tough Year for the Pet Economy
While CHWY stock is swinging up more than 7% this afternoon, that doesn’t take away from the wider pessimism that has affected the sector. With macro headwinds like stubbornly elevated inflation impacting the pet economy, CHWY finds itself down approximately 34% year-to-date (YTD) as of this writing. By default, the stock symbolizes a high-risk endeavor.
Earlier this year, The Wall Street Journal noted that, while Americans have grown accustomed to spoiling their furry family members, many pet-owning households have been forced to make increasingly difficult choices due to inflation. At the time, the cost of pet food had soared 15% year-over-year (YOY). Further, the cost of pets and pet products had jumped 12% YOY.
However, to Gajrawala’s point, CHWY stock may hold a critical advantage here. With the underlying company tied largely to higher-income groups requesting recurring product shipments, Chewy could be able to weather the storm better than competitors.
In fact, financial data from Gurufocus shows that Chewy’s gross margin consistently expanded from 17.47% in fiscal year 2018 to 28.03% in fiscal 2023. Further, on a trailing-12-month (TTM) basis, gross margin clocks in at 28.33%. Therefore, Chewy appears to be benefitting from pricing power.
Finally, the pet market itself may be enjoying a broader rebound. For instance, Petco (NASDAQ:WOOF) shares are gaining around 4% on Tuesday while pet insurance provider Trupanion (NASDAQ:TRUP) is up more than 2%.
Why It Matters
Currently, analysts rate CHWY stock a consensus moderate buy on TipRanks. This assessment breaks down as 10 buys, eight holds and one sell. The average price target for shares lands at $24.17, implying about 11% upside potential as of this writing.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
