Pet retailer Chewy is likely to meet expectations when it reports its 1Q results this week, but a slowdown in consumer discretionary spending could put pressure on its bottom line.
Analysts at UBS are bearish on Chewy’s stock, with expectations of flat active customer growth and contracting adjusted profit estimates contributing to its Sell rating.
The broker is forecasting 12.2% net sales growth to $2.7 billion in 1Q, which translates to a nearly 0.40% decrease in the growth rate compared to the previous quarter, based on the four-year average annual growth rate.
That said, analysts are expecting a 13% acceleration in net sales per active customer (NSPAC) to $505, but noted that the growth was driven largely by pricing ahead of product cost inflation.
According to UBS, expectations for customer growth “dimmed a bit” when rival Petco noted that its customer count was essentially flat in 1Q.
“Looking out, CHWY’s NSPAC growth may slow as discretionary spending retracts and it laps sizeable pricing actions in the 2H'23,” UBS analysts wrote. “Until CHWY can reaccelerate new customer growth, this dynamic is likely to put pressure on top-line results moving forward.”
Margins will be under pressure from Chewy’s shift to consumables and away from discretionary pet products, UBS noted.
As for profits, analysts are forecasting an adjusted EBITDA margin contraction of around 25 bps to 2.2% in 1Q, which would result in a loss of $0.03 per share for the quarter.
The company is likely to hold its full year 2023 guidance alongside its 1Q results, which UBS called “sensible” given the softer top-line trends seen from its peer WOOF in that company’s recent results. Chewy is guiding net sales in the range of $11.1 billion to $11.3 billion for the year.
Analysts at UBS believe the market needs to gain confidence in Chewy’s path towards new customer growth.
“The company will likely point to its international expansion plan as an opportunity to grow its addressable market,” analysts wrote. “We think the more obvious path towards new customer growth is investing behind advertising this year which, in turn, will hurt profitability.”
Chewy is due to report its 1Q earnings on May 31.
Contact Angela at angela@proactiveinvestors.com
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