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Chewy sinks on cautious outlook but is the bottom in?

AInvestThursday, Mar 21, 2024 11:47 am ET
1min read

Chewy Inc. (CHWY) released its Q4 (Jan), beating on the top and bottom line and guiding in line with expectations. Initially, investors welcomed Chewy's Q4 results and in-line FY25 guidance. However, concerns about underwhelming industry demand this year led to a reversal in sentiment, causing the stock to trade moderately lower.

Shares of CHWY are down -5% for the session. There are signs that it may be able to find support around this $16 area. Investors should track the test of this level to see if the "bottom is in". 

CHWY reported GAAP earnings per share of $0.07, surpassing the consensus estimate of $(0.04 ) by $0.11. The company also reported a 4.2% year/year increase in revenues to $2.83 bln, exceeding the consensus of $2.8 bln. 

Chewy has provided its outlook for FY25 and released guidance for Q1 (Apr) and FY25 (Jan). 

Chewy anticipates the pet category to grow at a mid-single-digit rate over a multi-year period. However, in 2024, the year-over-year (yr/yr) growth for the industry will be lower than the historical average. The company expects unit growth to be muted due to pet household formation trends remaining below historical levels. 

In terms of pricing, Chewy does not expect a deflationary environment and projects no material pricing benefit on industry growth in 2024. These factors are likely to result in a year of modest growth for the industry before returning to normality in 2025. 

Chewy continues to expect delivering adjusted EBITDA margin expansion this year. The company has issued downside guidance for Q1 (Apr), projecting revenues of $2.84-2.86 bln compared to the consensus of $2.87 bln. For FY25 (Jan), Chewy's guidance of $11.6-11.8 bln is in-line with the consensus of $11.67 bln. 

Chewy's warning about lower-than-average growth trends in 2024, due to pet household formation below historical levels, and no material pricing tailwinds, contributed to this shift in investor sentiment. 

Despite the challenging industry environment, there were several positive takeaways from Q4. Chewy's surprise profit was driven by healthy non-discretionary demand and Autoship customer sales growth, resulting in a 4.2% increase in revenues year/year. 

The company's focus on premium businesses and expanding Chewy Vet Care clinics, as well as ramping up its Canada operations, are also noteworthy strategic priorities.

While Chewy is navigating an inflationary environment affecting discretionary spending, the pet category remains relatively resilient to recessionary conditions. The company's outlook for FY25 reflects a conservative approach, with projected revenues of $11.6-11.8 bln and Q1 (Apr ) likely facing some of the harshest headwinds. The stock may remain stagnant throughout the year unless there's a quicker recovery in discretionary demand. Investors should keep an eye on the company's progress in expanding its Autoship customer base, premium offerings, and international expansion as potential catalysts for future growth.


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