On Thursday, Deutsche Bank adjusted its outlook on Chewy Inc . (NYSE:CHWY), with the price target being lowered to $18 from $19, while maintaining a Hold rating on the stock. The firm's analyst cited a mix of better-than-expected fourth-quarter results and concerns over the company's long-term growth prospects as reasons for the adjustment.
Chewy's fourth-quarter performance exceeded expectations, with revenue and adjusted EBITDA surpassing Deutsche Bank's forecasts by 150 basis points and approximately $30 million, respectively. However, the company's guidance for 2024 has raised questions about Chewy's potential for sustainable top-line growth moving forward.
The pet retailer also reported its largest quarterly net customer loss in its history, shedding around 180,000 customers in the fourth quarter. This development has heightened worries about what Chewy's long-term growth rate could be. Although the company has achieved notable industry share gains and continued growth in net sales per active customer (NSPAC), there are indications that growth may slow to a low single-digit rate organically, excluding the impact of an extra week, as the benefits from premium products face challenges in the current macroeconomic environment.
Moreover, industry-wide pressures, including a decrease in pet household formation at the start of the calendar year 2024, have become more pronounced. Chewy's management anticipates some relief in these pressures in the second half of the year, with a return to normalized industry growth expected in calendar year 2025. Nonetheless, visibility into these outcomes is currently low for investors.
"All that said, Chewy has driven significant industry share gains and continued NSPAC growth as the company executes impressively in delivering Healthcare attach rates," said the analyst.
"All in, our estimates are largely unchanged over the course of 24/25, with 24 up modesty as we flow through the 4Q23 beat against FY24 guidance that was in line with our model, while 25 comes down modestly given our growing concerns around persistent user declines and expectations of slowing NSPAC growth," he added.
The revised price target of $18 reflects a reduction in the applied multiple from 15 times to 14 times Deutsche Bank's 2025 adjusted EBITDA estimate of $558 million. This change is attributed to decreasing confidence in Chewy's path towards high single-digit revenue growth.
InvestingPro Insights
As Chewy Inc. (NYSE:CHWY) faces scrutiny over its growth outlook, InvestingPro data provides a deeper look into the company's financial health and market performance. With a market capitalization of $7.65 billion, Chewy's valuation metrics reveal a company trading at a high earnings multiple, with a P/E ratio of 651.85 and an adjusted P/E ratio for the last twelve months as of Q3 2023 at 667.35. This indicates a premium market valuation relative to earnings, which aligns with one of the InvestingPro Tips highlighting that Chewy is trading at a high earnings multiple.
Additionally, the company's revenue growth has maintained a positive trajectory, with a 12.56% increase over the last twelve months as of Q3 2023. This suggests that despite the recent customer loss, Chewy is still expanding its revenue base. Another notable InvestingPro Tip is that Chewy holds more cash than debt on its balance sheet, which may provide some financial flexibility in navigating the current macroeconomic challenges.
Investors looking for a comprehensive analysis of Chewy's financials and future outlook can find additional InvestingPro Tips on InvestingPro. Currently, there are 11 tips available, offering insights ranging from net income growth expectations to valuation multiples. For those considering a deeper dive into Chewy's investment potential, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to exclusive data and expert analyses.
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