JPMorgan moved Chewy's rating to Neutral from Overweight in a Friday research note, highlighting continued macroeconomic pressure on the retailer's organic growth as the primary reason for the downgrade, even as company-level execution remains solid.
The firm's analyst, Doug Anmuth, established a December 2027 price target of $24, which he derived from approximately seven times his estimate of Chewy's 2028 adjusted EBITDA of $1.2 billion.
Market reaction was swift: Chewy shares dropped about 9% following its quarterly report on Wednesday, compared with an approximate 1% decline for the S&P 500. The company reported that organic growth remained under strain in the second quarter, with discretionary and premium purchases staying soft.
Despite the challenging category backdrop, Anmuth observed that Chewy continued to expand its footprint within the pet market, outpacing the broader sector by roughly two to three times. He pointed to healthy customer additions and retention as evidence of the company's share gains.
The analyst also noted that recent acquisitions SmartPak and Modern Animal performed better than expected, and management raised its full-year sales outlook by about $40 million at the midpoint.
On profitability, second-quarter adjusted EBITDA margin came in at 6.8%, topping guidance. Anmuth qualified the margin beat, saying it was almost entirely driven by about $15 million of timing-related and discrete gross-margin benefits, which included a tariff refund. He added that underlying margin improvement was supported by sponsored advertising, fulfillment efficiencies and productivity gains tied to AI initiatives.
Management outlined expectations for AI-related cost savings in the near term, projecting savings in the low tens of millions of dollars this year and scaling to roughly $50 million annually by fiscal 2027. The company has launched an AI assistant called Cai; the tool is resolving about 30% of chats through self-service for a selected group of app users.
Anmuth flagged capital returns and profitability as positives for the name. The company repurchased $200 million of stock during the quarter, a point the analyst cited in his assessment. Nevertheless, he moved the stock to the sidelines, citing what he described as muted organic growth.
Key points
- JPMorgan downgraded Chewy to Neutral from Overweight, citing persistent macro headwinds on organic growth.
- Price target set at $24 for December 2027, based on about seven times a 2028 adjusted EBITDA estimate of $1.2 billion.
- Company dynamics: share gains, acquisitions (SmartPak and Modern Animal) beating expectations, and a raised midpoint for full-year sales by roughly $40 million.
Risks and uncertainties
- Ongoing macroeconomic weakness that depresses discretionary and premium pet purchases, which could limit top-line growth for pet retail and consumer discretionary sectors.
- Dependence on one-time or timing-related items - such as the roughly $15 million of gross-margin benefits including a tariff refund - to beat margin expectations, which may not recur.
- Execution risk in realizing projected AI-driven savings: management expects low tens of millions this year and about $50 million annually by fiscal 2027, but the timing and scale of those savings remain subject to operational execution.
All figures and statements above reflect the contents of the analyst note and Chewy's reported quarterly results.