Without greater context, online pet products retailer Chewy (NYSE:CHWY) appears to be a slam-dunk case of an underperforming enterprise deserving of its market volatility. Last week, management disclosed less-than-encouraging guidance for the current quarter. Subsequently, investors headed for the exits. Still, the end result ignores the reality that the U.S. pet retail space is one of the bright spots in the consumer ecosystem. Therefore, I am bullish on CWHY stock as a contrarian idea.
CHWY Stock Suffers from Poor Guidance
To be fair, it’s not surprising that investors began dumping CHWY stock. Following the close of Wednesday’s session last week, Chewy reported its results for the fourth quarter. In terms of the headline numbers, the e-commerce specialist performed quite well. However, Wall Street couldn’t get over the lower-than-expected revenue forecast for Q1.
At first, circumstances appeared favorable. Management disclosed earnings per share of $0.07, exceeding analysts’ consensus view of a loss of $0.04. Further, the company’s adjusted EPS came in at $0.18, up from last year’s print of $0.16. Moreover, as TipRanks reporter Radhika Saraogi mentioned, the latest metric surpassed analysts’ estimates by $0.09.
On the top line, Chewy’s sales rose 4.2% year-over-year to $2.83 billion. This pipped the consensus target of $2.79 billion. Per Saraogi, “The year-over-year growth was driven by solid demand for Chewy’s health and non-discretionary consumable products. During the quarter, net sales per active customer (NSPAC) increased by 11.9% to $555.”
While that was fine and well, investors tuned into the guidance. This is where circumstances went a bit off the rails. Chewy’s leadership team revealed that it anticipates Q1 revenue to land between $2.84 billion and $2.86 billion. That would be up about 2% from the same period last year. Unfortunately, the range fell below the consensus revenue expectation of $2.89 billion.
Last week, CHWY stock ended up losing 5.3%. However, the red ink arguably appears overly aggressive. First, the Fiscal 2024 revenue projection is aligned with analysts’ average estimate of $11.7 billion. Chewy sees a range between $11.6 billion and $11.8 billion. Notably, this guidance reflects year-over-year growth of 4% to 6%.
Second, Goldman Sachs (NYSE:GS) analyst Alexandra Steiger reiterated a Buy rating on Chewy stock. According to Saraogi, “The analyst is bullish about CHWY’s long-term prospects and expects it to benefit from international expansion, ad revenue opportunities, and strong momentum in the Chewy Health unit.”
It’s hard to disagree with the point. Here’s why.
Pet Products Market Is a Huge Bright Spot for CHWY Stock
Looking at business media headlines, it’s difficult not to get discouraged by retail-oriented ideas like CHWY stock. It’s an ugly world out there. Perhaps most conspicuously, Americans have racked up credit card debt of more than $1 trillion, a dubious record. Finally, evidence has emerged about the impact of this profligacy. Earlier this year, credit card delinquencies – particularly the serious kind – have started to rise.
In that respect, it’s also not surprising that investors exited CHWY stock. The latest guidance appears to suggest that consumers will trim down their spending, which could negatively impact Chewy. Given the broader headlines, it’s not an unreasonable thesis. Still, market participants should consider other data before making a final decision.
What could really distinguish CHWY stock as a bullish candidate is its core market. According to the American Pet Products Association (APPA), total U.S. pet industry expenditures reached $147 billion in 2023. This figure represents a 7.46% growth rate over 2022’s haul of $136.8 billion. At a time when consumers were struggling with high inflation and high borrowing costs, they prioritized their furry family members.
While it’s not an apples-to-apples comparison, there may be some evidence that the current generation of pet owners operate under a far different ethos than prior generations. Back during the Great Recession, pet abandonment represented a sorrowful trend. Today, society is witnessing the opposite dynamic.
Consumers have every reason to prioritize human needs over non-human needs. Yet, time and time again, throughout the post-pandemic new normal, pet owners continue to pay up. It’s not a subjective opinion. The data is as clear as daylight.
Not only that, but the APPA projects that 2024 pet industry sales will total $150.6 million, again representing upward growth. The numbers sell themselves. Basically, CHWY stock is tied to an incredibly resilient market.
Another Surprising Development May Lift Chewy
Another pleasant surprise for CHWY stock stems from sentiment in the broader e-commerce space. Back during the initial onslaught of COVID-19, e-commerce sales as a percentage of total retail transactions skyrocketed for obvious reasons. However, as society normalized, and as inflation took its toll, this metric declined to 14.4% in Q2 2022.
However, rather than continuing to erode as inflation worsened, e-commerce trends rose. As of the latest read (Q4 2023), this stat has jumped to 15.6%. At its peak in Q2 2020, the e-commerce rate was 16.5%. Stated differently, consumers prefer the convenience of online marketplaces.
Combined with the resilience of pet-owning households, the red ink in CHWY stock seems overdone.
Is CHWY Stock a Buy, According to Analysts?
Turning to Wall Street, CHWY stock has a Moderate Buy consensus rating based on 11 Buys, six Holds, and one Sell rating. The average CHWY stock price target is $23.38, implying 50.8% upside potential.
The Takeaway
At first glance, Chewy’s value erosion is understandable. Producing disappointing earnings guidance as a retailer is not what investors want, especially amid this tricky economic backdrop. However, the pet-owning household is a much more resilient demographic than Wall Street realizes. Combined with society’s penchant for online shopping, CHWY stock seems like a discounted opportunity.
