Can Chewy pick up double-digit gains in 2023?



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Online pet products and services Chewy, Inc. (NASDAQ: CHWY) the stock has nearly doubled from a May 23, 2022 low of $22.22. The pandemic helped accelerate the adoption of e-commerce and pet ownership, which is Chewy’s wheelhouse. Once a pet is adopted or acquired, it has essential needs, including food, medication and grooming supplies. Collecting these basic supplies can be a tedious task to deal with every month. Chewy has simplified this with its Autoship service that will automatically ship selected products to pet owners on a regular basis.

Autoship has been an anchor for the company in terms of consistent and stable cash flow. Customers are encouraged to use Autoship with deep discounts. It also slates the PracticeHub platform for veterinarians to provide an e-commerce marketplace solution to increase practice revenue from clients. Autoship guarantees repeat business from customers. The company has joined forces with Lemonade, Inc. (NASDAQ: LMND) to expand its CarePlus insurance and wellness programs. The company expects to launch its nationwide Lemonade offerings in the spring of 2023. Chewy has proven that

Non-discretionary expenses

Just as consumers need staples and grocery store essentials, pets need their form of essential medications and food. Chewy notes that 83% of revenue comes from non-discretionary products such as pet food and health supplies, while discretionary items such as toys are declining (-5%) year over year.

Consumer staples stocks have performed well this year, but pet staples stocks have underperformed, as Petco Health and Wellness Company, Inc. (NASDAQ: WOOF) shares are down (-49%) for the year, Lift! Group Co. (NASDAQ: PET) is down (-78%), and PetMed Express. Inc. (NASDAQ: PETS) is down (-28%) for 2022.

Chewy has data indicating Autoship customers spend $400 annually in year two and up to $900 annually in year 4. Chewy is also expanding its private label products under the Tylee’s brand and pet wellness brand Vibeful. In addition, it continues to build its Chewy Health ecosystem with services such as Connect With a Vet telehealth service and CarePlus pet insurance plans.

Earnings surprise

Chewy released its Q3 2022 earnings on December 8, 2022. The company reported earnings per share of $0.01 versus consensus analyst estimates for a loss of ($0.06), a beat of $0.07. Revenue grew 14.5% year-over-year (YoY) to $2.53 billion, beating consensus estimates of $2.46 billion. Autoship sales increased 18.8% year-over-year to $1.86 billion, accounting for 73.3% of total sales. Gross margins increased by 200 bps to 28.4%. The company ended the quarter with 20.5 million active customers, up 9% compared to the third quarter of 2019.

Chewy CEO Sumit Singh commented, “Chewy’s third quarter results showed accelerating double-digit top-line growth, sustained gross margin expansion and solid free cash flow generation. The fact that we are simultaneously driving top-line growth and expanding margins is testament to our ability to get big fast and fit fast, independent of the macro environment.”

Upside guide

Chewy issued upside guidance for Q4 2022 revenue to come in between $2.63 billion and $2.65 billion vs. $2.63 billion. Chewy expects full-year 2023 revenue of $10.2 billion to $10.4 billion versus $9.95 billion consensus analyst estimates. CEO Singh summed up why Chewy is a recession proof, “The operating environment remains dynamic and evolving. What hasn’t changed is how much pet parents value their pets’ enduring companionship, and this emotional bond sustains the pet category through all phases of the pet economic cycle.”

Can Chewy pick up double-digit gains in 2023?

Rising price channel appears

The weekly candlestick chart on CHWY stock illustrates a new ascending channel that formed after an October 2022 swing low. Additionally, the stock held the weekly market structure low (MSL) buy trigger of $29.79 as it continued to form higher highs and higher lows into the results report for the third quarter of 2022.

The weekly 20-period exponential moving average (EMA) has now crossed back up through the weekly 50-period MA and offers ascending support at $39.40. The weekly 50-period MA support is at $38.76. Trading volume remains high, and sales are absorbed in the rising price channel. The weekly stochastic has fluctuated higher and continues up towards the 80 band.

A sloppy weekly seed wave would trigger a breach of the $51.57 double top, setting up potential reversal zones (PRZs), which also serve as price targets based on Fibonacci (fib) extensions. For example, the 1.27-fib target is $59.88, followed by the 1.44-fib target at $64.15 and the 1.618-fib target at $70.19.

Each of these fib targets is a potential reversal area to watch out for, which is no guarantee that the stock will continue to the next fib target. If CHWY breaks below the rising price channel lower trendline, pullback supports will be at $37.05, $33.55, $31.89, $29.79 weekly MSL trigger and $26.47

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