Mizuho raised its rating on U.S. online pet retailer Chewy (NYSE:CHWY) to Outperform and increased the price target to $50, citing steady growth in its customer base and early signs that margin pressures are easing.
Chewy is scheduled to release quarterly results on Wednesday. Shares rose 2.5% to $43 in premarket trading on Monday.
The brokerage noted it expects “another strong print and positive catalyst, with modest increases to both revenue and adjusted EBITDA guidance.”
Mizuho projects second-quarter revenue growth of 8% to 9%, above the company’s guidance of 7% to 8%, with customer additions of roughly 130,000 to 150,000.
“Underlying momentum [is] strongly intact,” the analysts wrote, highlighting that high-frequency data indicates growth extending into early Q3, potentially prompting Chewy to raise its full-year sales outlook.
Margins have faced pressure from steep discounts on the autoship subscription program, which incentivizes new customers with deeper reductions.
Mizuho commented that while this has affected profits recently, “We do not view this as a particular concern – and more of a high-quality problem, given the stickiness of autoship and the significant future benefits.”
Efficiency improvements from investments in automation and a new Houston fulfillment center are beginning to materialize. “We see upside on OpEx over the balance of the year as early investments scale,” the analysts added.
Chewy’s initiatives in advertising, automation, and veterinary services are expected to support long-term growth.
Mizuho also noted that private equity firm BC Partners now holds less than half of Chewy’s shares, which “could open up the holder list for CHWY.”
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