CHWY | Buy The Dip

Good 2Q for CHWY, revenue slightly below expectation, while EBITDA came in well ahead.  Guidance for the remainder of the year is tempering revenue growth moderately while taking up EBITDA margins materially. To be clear, we were getting less bullish on CHWY into this event as we moved the name much lower on our Long list as the stock hit $50 a couple weeks back specifically while highlighting that we were getting concerned about ecommerce rate of change in 2H in a deteriorating Macro environment.  The risk/reward wasn't looking as bullish in that context after the stock had more than doubled from the bottom.  Our macro concerns look to have been right as the company tempered 2H growth.  There are clearly puts and takes this quarter. On the negative side, the business rate of change setup here in mid-2022 is not looking as bullish as we thought it would.  Gross profit is accelerating but revenue growth looks stuck in the low double digits as implied by the guide and it slowed slightly this Q.  Customer count was perhaps the biggest disappointment, with a slight decline this Q vs last quarter as the company noted it is still seeing lower retention of the Covid cohorts, though expecting that to normalize within a few quarters.  Gross margin is showing strength from leveraging supply chain investments and pricing moves that are offsetting the inflationary pressures, though management guided to less expansion in the 2nd half of the year.  Still, CHWY is one of the best growers in ecommerce.  Looking at some major ecommerce retailer results in 2Q 2022, CHWY +13%, AMZN Online Stores -4.3%, Etsy GMS -7.5%, Wayfair US -10%, eBay GMV -16%, OSTK -34%.  The market reaction so far suggests disappointment in the top line guide, but the long term call is very much intact.  CHWY is a share gainer in one of the best consumer categories of pet care.  Gross customer adds are still tracking ahead of 2019 while LTM spend per customer is up mid-teens YY and trending 31% above 2019.  CHWY is launching new businesses like insurance and Practice Hub to drive continued wallet share of the pet parent, with many more new opportunities ahead of it.  We think this stock can revisit the $50 to $75 range within 12 months. It could be a long time before we see peaky multiples across the consumer growth space again.  So maybe the $100+ CHWY stock is on hold for now, but we see real earnings and cash flow potential here in combination with high revenue and profit growth as one of the better ecommerce platforms out there. At $50+ we think you should be selling some, down around $30 we’re definitely buyers.  After this correction there’s a good chance this starts going back up our Long list.