On Monday, RBC (TSX:RY) Capital maintained its positive stance on Chewy Inc . (NYSE: NYSE:CHWY), reiterating an Outperform rating and a price target of $42.00, which represents the highest among analyst targets ranging from $24 to $42.
According to InvestingPro data, the company has demonstrated strong momentum with a 63% return over the past year. The firm's outlook is based on a combination of factors indicating a favorable future for the pet retailer. The analyst observed that trends in the pet industry appear to have stabilized and that there are preliminary signs of an increase in pet household formation.
The expectation of Chewy's return to high single-digit or better top-line growth is supported by the company's continued gains in market share, which are believed to be driven by higher advertising expenditure. With current gross profit margins at 29% and a healthy return on assets of 13.6%, RBC Capital suggests that these dynamics, coupled with Chewy's strategic investments in sponsored ads and supply chain improvements, including fulfillment center automation, are likely to result in healthy margin growth.
The $42 price target set by RBC Capital is derived from a multiple of approximately 20 times Chewy's projected adjusted EBITDA for 2026, which is estimated at $881 million, compared to the consensus estimate of $819 million. This valuation reflects confidence in Chewy's long-term earnings potential and its ability to execute on its growth strategies effectively.
Chewy's focus on sponsored ads is part of the company's software investments aimed at unlocking additional capacity, which is expected to contribute to revenue growth. Meanwhile, ongoing enhancements to the supply chain are anticipated to bolster operational efficiency and margins.
The analyst's reiterated rating and price target underscore a belief in Chewy's market position and its ability to capitalize on the positive trends within the pet industry. Chewy's strategic investments and operational improvements are seen as key drivers for the company's sustained financial performance in the coming years.
With an overall Financial Health score of GOOD from InvestingPro, which offers 15+ additional exclusive insights and a comprehensive Pro Research Report, investors can gain deeper insights into the company's growth trajectory and valuation metrics.
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