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Bull of the Day: Chewy Inc. (CHWY)

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Chewy Inc (CHWY - Free Report) is a Zacks #1 (Strong Buy) that operates as on online retailer, offering a variety of pet products. Chewy sells everything for pets on its Chewy.com website including food, toys, treats, vitamins and supplements.

Recent Buying Interest

The stock has surged after more investors noticed a shift to online pet suppliers. It looks like COVID-19 will force people like myself to buy from Chewy.com instead of their vet or local retailer. For that reason, we saw the CHWY almost double from its recent lows, despite the overall market being down.

Even if the lockdowns don’t last, more consumers will now be aware of Chewy and have accounts opened. This will allow for marketing opportunities in the future that will help retain customers and drive revenue.

Q4 Earnings

Chewy reported earnings late last week, reporting a 12% surprise to the upside. While the bottom-line beat, revenues came in as expected.  The stock traded lower as investors where expecting more. However, there is reason to believe that earnings will improve going forward.

The company guided Q1 higher, expecting revenues to come in at $1.50B-$1.52B vs the $1.45B expected. Net sales were up 7.8% year over year and this is expected to improve based on the stay at home environment. Here are some comments from the CEO Sumit Singh:

 “While 2019 closed on a high note, and 2020 got off to a strong start, the world changed dramatically with the coronavirus outbreak. In times like these, we know how special and comforting the bond is between humans and pets, and we devote ourselves every day to supporting those special relationships. We are here, 24/7, caring for the safety and well-being of our team members and meeting the increased shop-at-home needs of our customers, staying true to our mission of being the most trusted and convenient online destination for pet parents everywhere.” 

Estimates

Chewy has been public for under a year and has only four quarters reported under its belt. Two of those four quarters have been surprises to the downside, which is part of the reason the stock hasn’t been able to get back above its IPO high.

After the recent quarter, we will see estimates start to rise. Already we can see improvement for both the current quarter and year.  

Analysts

The company did not report full year guidance, but analyst have responded positively to the quarter. Raymond James had positive commentary, saying the 35-37% implied revenue growth from the Q1 guide will be driven by increased demand from COVID-19. Additionally, the firm increased revenue estimates for 2020 by 6.6%.

JPMorgan was also out after earnings with a reiteration on their Overweight rating on CHWY. The firm puts a $43 price target on the stock, around 25% higher from current prices.

Pet Market Sales Keep Growing

We are crazy for our pets and sales in the industry have accelerated over the last 10 years. According to Statista, Pet Food is the hottest segment, with almost $37 billion in food sold in 2019. Vet care was the next segment, with over $29 billion in 2019.

Moreover, the pandemic fears have led to a massive increase in pet sales. According to Nielsen, year over year dollar growth for pet food was up 6.4% the first week of March.

Technicals

The stock is significantly above the 50 and 200-day moving averages, which reside around the $29.50 level. The recent push higher to the $40 level has seen some profit taking. However, after the recent move lower after solid EPS, more buyers should show themselves. Look for support around $30-31 and long-term move higher to the $50 area. Strong demand and short covering should be fuel to get prices higher.

Bottom Line

The stay at home orders for many people across the country have pet owners turning online to meet their pet’s needs. Sales and customer acquisitions will break records for both March and April.

After the lockdowns are lifted, pet owners will likely remain Chewy customers. The company will see its recent growth amplified by people’s desire for the convenience they found during the lockdowns.

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