Chewy gains market share as pet retail spending improves – BofA

Bank of America reiterated its Buy rating on Chewy (CHWY) with a $49 price target, citing the company's significant market share gains within a stabilizing U.S. pet retail sector. BofA's aggregated spending data shows pet retail sales are now flat year-over-year in May, a notable improvement from a 4% decline in Q1, with Chewy outperforming rivals by leveraging its online model. Early Q2 data for Chewy is tracking ahead of expectations, and the firm projects Chewy's 2025 earnings growth at 25% compared to 11% for peers, driven by its superior revenue trajectory and anticipated EBITDA margin expansion.

Analysis

Bank of America's analysis reinforces a bullish outlook on Chewy (CHWY), citing its outperformance within a stabilizing U.S. pet retail market. Spending data indicates a significant sector recovery, with year-over-year sales trends improving from a 4% decline in the first quarter to flat in May, supported by normalizing inflation. Amid this backdrop, Chewy is actively gaining market share, demonstrated by its 8% revenue growth in Q1, which stands in stark contrast to the 2% revenue drop reported by its rival, Petco. This divergence is attributed to Chewy's effective online business model capturing the secular shift from brick-and-mortar retail. Forward-looking indicators are also positive, as early second-quarter data is tracking ahead of BofA's 8% growth forecast. While tougher comparisons in the fourth quarter present a risk for a modest slowdown, the long-term projection remains strong, with the firm forecasting Chewy's earnings to grow 25% in 2025, more than double the 11% expected for peers, driven by sustained revenue growth and expanding EBITDA margins.

Key Decisions for Investors

• Given Chewy's demonstrated market share gains and a projected 25% earnings growth for 2025, investors could view the current environment as an opportunity to initiate or add to a long position, aligning with Bank of America's Buy rating and $49 price objective.
• Monitor Chewy's upcoming second-quarter earnings release for confirmation that revenue growth meets or exceeds the 8% estimate and for any updates on EBITDA margin expansion, as these are key pillars of the bullish thesis.
• Investors should consider the performance divergence between Chewy and its brick-and-mortar peers, as the stark contrast in Q1 revenue growth (+8% for Chewy vs. -2% for Petco) may support a pairs trading strategy.
• Be mindful of potential short-term volatility towards the end of the year, as the report flags the risk of a modest slowdown in the fourth quarter due to more difficult year-over-year comparisons.