Chewy Inc. CHWY has surged an impressive 36.5% year to date, capturing the attention of investors. With this strong run on the bourses, many are wondering whether Chewy stock still has room to run or if it is time to take profits. With its continued dominance in the pet care space and ambitious expansion plans, Chewy presents opportunities and potential risks. As investors look for their next best move, evaluating whether this rally is sustainable or if the stock is primed for a pullback is important.

While Chewy’s year-to-date gain is impressive, the stock has underperformed the industry, which has risen 42.3%. However, the stock still outperformed the Retail-Wholesale sector and the S&P 500 index, which posted respective gains of 32.4% and 27.7%.

CHWY Stock YTD Performance

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Chewy stock closed at $32.26 last Friday, sitting 17.5% below its 52-week high of $39.10, reached on June 27, 2024. CHWY is trading above its 50 and 200-day moving averages, suggesting a bullish trend. With that in mind, let’s dive into CHWY’s prospects and determine the best course of action for your portfolio.

CHWY Trades Above 50 & 200-Day Moving Averages

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Decoding Tailwinds Behind CHWY’s Impressive Run

Chewy has established itself as a dominant player in the online pet retail industry, leveraging innovative strategies and a customer-centric approach. The company’s expanding customer base, recurring revenue model and diversified service offerings, including veterinary clinics and pharmacy services, provide a solid foundation for continued growth. The company foresees fiscal 2024 net sales between $11.79 billion and $11.81 billion, implying approximately 6% year-over-year growth.

One of the significant drivers of Chewy’s business is its Autoship program, which accounted for 80% of third-quarter fiscal 2024 net sales. With Autoship customer sales growing 8.7% to $2.3 billion, the program provides steady recurring revenues. By focusing on non-discretionary categories like consumables and healthcare, Chewy ensures revenue stability, even during macroeconomic uncertainties. 

Chewy's ability to grow its active customer base is noteworthy. The company added 160,000 customers sequentially in the third quarter, reaching 20.2 million active users. This growth is attributed to Chewy’s targeted marketing strategies, effective use of data analytics and enhancements to the user experience through its website and app. CHWY’s Net Sales Per Active Customer (“NSPAC”) reached $567 in the quarter, reflecting year-over-year growth of 4.2%.

Chewy’s foray into the veterinary services market through Chewy Vet Care has unlocked a $25 billion total addressable market. By the end of the third quarter, Chewy operated six vet clinics and was on track to meet the high end of its target range of 4-8 clinics for fiscal 2024. These clinics serve as gateways for attracting new customers and embedding them into the Chewy ecosystem.

Chewy's Sponsored Ads business is ramping up nicely and is on track to reach the low end of its long-term target of 1% to 3% of net sales by the end of 2024. This high-margin revenue stream enhances Chewy’s overall profitability while creating opportunities for vendors to promote their products. Chewy’s expansion into Canada, its first international foray, completed a full year of operations in the third quarter. The Canadian market is growing steadily with improvements in Autoship penetration, net sales and profitability.

What Could Hinder Chewy Stock’s Momentum?

While Chewy continues to lead the pet e-commerce space, several factors could exert downward pressure on the stock. Slowing growth, potential customer acquisition saturation and rising cost pressures are critical areas that investors should monitor.

Despite the third-quarter adjusted EBITDA margin expanding to 4.8%, Chewy’s fourth-quarter margin guidance signals a sequential decline to 3.4%. This contraction is attributed to higher seasonal marketing costs and promotional activity during the holiday season. 

Chewy also operates in a highly price-sensitive market, where competitors such as Petco Health and Wellness Company, Inc. WOOF, Central Garden & Pet Company CENT and BARK, Inc. BARK quickly adjust their pricing strategies to attract customers. In addition, underlying inflationary pressures, especially in logistics, labor and raw materials, could squeeze margins. 

The company’s elevated advertising and marketing expenses, which reached $191.8 million or 6.7% of sales in the third quarter, reflect an aggressive push to acquire and retain customers. For the full year, these expenses are projected to reach the high end of the 6% to 7% guidance range. This may strain profitability if revenue growth does not pick up.

How Consensus Estimates Stack Up for CHWY

The Zacks Consensus Estimate for earnings per share has seen downward revisions. Over the past 30 days, analysts have lowered their estimates by 3 cents to 20 cents per share for the final quarter and by 7 cents to $1.08 for fiscal 2024. 
 

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Buy, Hold or Sell CHWY Stock?

Chewy’s solid financial performance, strategic initiatives and operational efficiencies make it a compelling choice. From the Autoship program and expanding healthcare offerings to the successful adoption of its mobile app and membership program, Chewy demonstrates the ability to innovate and grow across multiple dimensions. However, challenges remain for Chewy, including customer acquisition saturation, rising costs and increased competition. Despite recent margin gains, higher seasonal advertising and marketing costs could pressure profitability. Downward revisions in earnings estimates signal concerns about future performance. With risks and rewards in balance, it may be prudent to stay on the sidelines for now. CHWY currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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