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Investing.com -- Mizuho upgraded U.S. online pet retailer Chewy to Outperform and lifted its price target to $50 given its steady customer growth and signs that pressure on margins is starting to ease.
Chewy will report quarterly results on Wednesday. Chewy shares are up 2.5% at $43 in premarket trading on Monday.
Mizuho said it expects “another strong print and positive catalyst, with modest increases to both revenue and adjusted EBITDA guidance.”
The brokerage forecast revenue growth of 8% to 9% in the second quarter, above company guidance of 7% to 8%, and said customer numbers should rise by 130000 to 150000.
“Underlying momentum [is] strongly intact,” the analysts wrote, noting that high-frequency data shows growth carrying into early third quarter, which could prompt Chewy to lift its annual sales outlook.
Margins have been pressured by heavy discounts on Chewy’s autoship subscription program, which offers deeper cuts to attract new buyers.
Mizuho said this weighed on profits in recent quarters but added, “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.”
There are efficiency gains as spending on automation and a new Houston fulfillment center begins to pay off. “We see upside on OpEx over the balance of the year as early investments scale,” they said.
Mizuho added that Chewy’s push into advertising, automation and veterinary clinics should support growth longer term.
It also noted that private equity firm BC Partners now owns less than half the company’s shares, which “could open up the holder list for CHWY.”