Seth Basham upgraded Chewy from Neutral to Outperform with a price target lifted from $30 to $35.
Online pet industry sales could account for 25% of total sales by 2023 as consumers continue flocking towards subscription-type consumables through online channels, Basham wrote in the note. This implies online pet industry sales will grow at a compounded annual growth rate of around 22% over the coming five years. As Chewy continues to establish a dominant position in the online pet space, the company will see outsized benefits.
Meanwhile, Basham said Chewy continues to show favorable company-specific economics, including flattish customer acquisition costs and accelerating revenue per customer. Part of this can be attributed to a successful expansion into the new $5 billion pharmacy pet market.
Looking forward, Chewy's gross margin growth potential of 220 to 520 basis points from 22.8% in the past 12 months is "very reasonable" as a favorable sales mix towards private label sales offers "ample support." The company can also see benefits from better fulfillment cost leverage and SG&A leverage in 2020.
Shares of Chewy were trading higher by 1.5% at $28.89.