By Jacob Sonenshine

Everyone loves their pet -- and that means investors should love Chewy's stock.

Yes, shares of the pet-product retailer have dropped 11%, to $33.29, since the stock market topped out on Feb. 19. It's a painful drop, to be sure, but Chewy stock has held up better than the S&P 500 index, which has dropped 12% since its all-time high, partly because consumers are likely to keep spoiling their pets even if they cut spending elsewhere.

And if the economy holds up just fine? Then Chewy should perform as well as it ever has. Fourth-quarter sales of $3.25 billion grew 7% year over year, excluding the extra week in the quarter, and beat expectations of $3.19 billion, according to the company's latest earnings report, released in late March. The growth came partly as the company reported that it had 20.5 million customers, a couple million above the expected total. Average sales per customer also grew, and the company also beat earnings forecasts for the 16th time during the past 20 quarters.

Management's guidance was lacking -- it called for $12.5 billion in sales this year, or 6.5% growth, at the midpoint -- and there are concerns about a slowdown in pet acquisition. Morgan Stanley analyst Nathan Feather points out that new pet-owing households dropped for two consecutive years after a pandemic surge, and are only now seeing a recovery. "Pet household formations stabilized in '24, but are still growing below the long-term trend," he writes. "Further normalization would represent a tailwind to active customer growth," one of the core reasons he sees sales the year exceeding expectations again.

Feather isn't alone. "As the pet category begins to recover, we are attracted to the intermediate-to longer term prospects of a CHWY [business] model," writes Mizuho Securities analyst David Bellinger, who rates the stock a Buy with a $43 price target, representing 30% upside from here.

Mordor Intelligence forecasts pet spending will grow about 5% annually to $108 billion by 2030. Just under 90 million U.S. households own pets, and more could be coming. Millennials are coming of age, moving into homes, and expressing the strongest interest in pets. And they spend more on their furry friends in a trend called the "humanization" of pets.

Faster sales growth could translate into higher margins and faster earnings growth. Analysts' current forecasts call for the company's operating margin to rise to just over 5% by 2030, up from 1% last year, as sales grow and management winds down what were aggressive increases in marketing and similar expenses to reclaim customers. Adjusted earnings per share are expected to grow 11% annually over the coming six years.

That should bring the stock higher, especially if results beat expectations. Shares now trades at 27 times expected adjusted EPS this year, down from 31 times on Feb. 19. While this is a few points above the S&P 500's multiple, the stock deserves some premium given the many years of profit growth ahead.

And that should make investors as happy as a dog with a bone.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 11, 2025 21:30 ET (01:30 GMT)

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