MKM Weighs In On Chewy, Says Investors 'Hungry' For Pure-Play Online Pet Retailer

Chewy Inc CHWY made its public debut Friday, trading at $36 per share with an estimated $8.8-billion market cap.

MKM Partners weighed in "potential for faster revenue growth and greater gross margin expansion."

The Analyst

Rohit Kulkarni issued a note on Chewy, but did not initiate coverage or make a stock recommendation. 

The Thesis

Chewy’s traction over the past three years has been impressive, Kulkarni said in a Friday note: 4x growth in gross sales, 3x growth in active customers, rising gross margins and 67% of sales generated from its autoship subscription program. 

What gives PetSmart — Chewy’s parent company — the edge is that PetSmart will own more than 278 million shares of CHWY Class B common stock, representing approximately 70% of total outstanding shares, and will gold 77% of the combined voting power after the offering, the analyst said. 

“Given the 22% increase in IPO pricing during its two-week IPO roadshow, we believe investors are indeed hungry for a pure-play online retailer catering exclusively to consumers' furry friends. Such pre-IPO pricing trends, coupled with a sticky majority holder, indicate a healthy post-IPO price performance, in our view, particularly over the near term." 

Chewy's positives include steady growth in the total spend on pets in the U.S. to the tune of 4-5% annually, reaching approximately $70 billion in 2017, Kulkarni said. 

This includes food, supplies, veterinary services and non-medical services, he said. 

Pet superstores like Petco and PetSmart have a combined market share of less than 20%, implying a highly fragmented market, the analyst said. 

Millennials are more likely to have pets rather than to get married or have kids, and premium pet foods are gaining adoption on the back of trends such as organic, non-GMO, freeze dried, raw and grain-free, Kulkarni said. 

The pet industry is one of the most resilient categories during economic downturns due to the nature of the relationship between pets and their parents, he said.

"During the Great Recession, pet care spending accelerated, per industry reports, as it is increasingly viewed as a core consumer staple by pet parents." 

Price Action

Chewy shares were trading higher by 60.68% at $35.35 at the time of publication Friday. 

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Chewy IPO: A Hybrid Play On Lucrative Pet Care Market, E-Commerce