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Needham upgrades Chewy, says shares can rally more than 40% because the pet space is defensive

Shares of Chewy have plummeted 35% this year, but the stock is finally due for a comeback according to Needham. Analyst Anna Andreeva upgraded the pet retailer to a buy from a hold rating in a note to clients, citing improving supply chains and a strong recurring shipment — or autoship — business among the reasons for liking the stock. “The pet space is defensive (historically outperforms during recessions) and demand is inelastic (cost increases are passed through to consumers, especially in the staple-like Consumables category), plus the headwinds from last year across the supply chain and wage/labor pressures are starting to dissipate,” she wrote. Meanwhile, shares of Chewy could gain 44% from Friday’s close based on the firm’s $55 price target. The upgrade from Needham comes as Chewy reported a beat on first-quarter expectations following four quarters missing consensus EBITDA. Andreeva thinks that momentum likely persisted in the second quarter. Even as net ads remains under pressure, Chewy’s autoship business “continues to grow at a double-digit clip” and accounts for 72% of sales, Andreeva said. The slowdown is likely stemming from Chewy’s hardgoods business, but other sectors including healthcare continue to boast strong growth, she wrote. Chewy also stands to benefit from greater spending per pet, particularly among millennials. — CNBC’s Michael Bloom contributed reporting

A dog sits in front of the New York Stock Exchange (NYSE) during Chewy Inc.’s initial public offering (IPO) in New York, U.S., on Friday, June 14, 2019.
Michael Nagle | Bloomberg | Getty Images

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