Key Takeaways
We initiate STARS coverage on Chewy, Inc. (CHWY) with a Hold opinion and 12-month target price of $88, calculated using a 3.5x FY 23 (Jan.) EV/sales multiple, slightly higher than its 3.4x online retail peer average.
We believe the pet industry is set to grow at attractive rates due to the pandemic-driven pet boom and a shift toward premiumization. Additionally, online penetration in the pet food and supplies industry is still in its early stages (30% in 2020 vs. >50% for electronics), and we think CHWY is well positioned to capture this growth as the online leader in the pet category.
Margin expansion will likely be a greater challenge given pet food and supplies are relatively low-margin products. Additionally, competitive threats from Amazon and Walmart could pressure margins, along with near-term headwinds, including wage investments, higher freight, and greater promotional activity.
Despite the stock being down over 30% from its all-time highs, we think CHWY shares are fully valued trading at a forward EV/sales multiple of 3.8x vs. the 3.4x online retail peer average. Investors have recently re-rated growth stocks lower due to the rise in treasury yields.
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