Chewy Inc. Sees Stock Rise After Citi Research Upgrade

Shares of Chewy Inc. (NYSE: CHWY) saw a rise of over 3% in pre-market trading on Friday. This followed an upgrade from Citi Research, which changed its rating from neutral to buy, citing an "idiosyncratic EBITDA opportunity."

The upgrade signals analysts' confidence in Chewy’s potential for margin expansion and sustainable revenue growth, bolstered by unique operational strengths in the pet retail market. Alongside the upgrade, Citi revised the target price from $28 to $40.

Citi's analysts identify several company-specific factors driving Chewy toward profitability and enhanced EBITDA performance. These include:
– A rebound in customer acquisition rates
– A streamlined cost structure

According to projections, Chewy’s active customer count—a vital metric that had declined over the last two years—seems to be stabilizing and may turn positive by year’s end. Chewy's ability to attract and retain customers amid a slowing pet industry suggests effective differentiation from competitors.

Citi notes Chewy's focus on recurring revenue streams (like auto-ship services) and expanding health and wellness product offerings as crucial for market share growth. The report highlights Chewy’s increasing use of automated fulfillment centers, aimed at managing demand efficiently and reducing operational costs.

Through these changes, Chewy aims to enhance service quality while achieving profitability, particularly with a product mix that now includes higher-margin items such as sponsored ads and private-label health products. Citi estimates that Chewy's EBITDA margin could reach 5-10% in the near future due to these operational efficiencies and high-margin revenue streams.

While Citi's outlook reflects a favorable risk-reward profile for Chewy, it notes potential risks, particularly around the sustainability of customer growth and competition from larger pet retail players.