Piper Sandler analysts upgraded Chewy (NYSE:CHWY) to Overweight from Neutral in a note Friday, raising its price target for the stock to $35 from $22 per share.
"While top line trends are likely still muted, CHWY appears to be at a profitability inflection point," says the firm.
The analysts note that while Chewy's top-line trends might still be subdued, the company is showing promising signs of margin improvement.
They attribute this to several factors, including "gross margin expansion" driven by a shift to higher-margin revenue streams and well-managed discounting practices.
According to Piper Sandler, Chewy's discounting in the second quarter of 2024 was notably lower than the previous year, reflecting effective control over promotional activities.
Additionally, improvements in "SG&A leverage" through automation and efficiency gains are contributing to the company's financial health. These operational efficiencies are considered critical as Chewy seeks to enhance profitability amid ongoing challenges.
The analysts acknowledge that Chewy has faced pressure from declining net ads over the past six quarters, which has been a major concern for investors.
However, there is cautious optimism about recent developments.
They note that CHWY management has reported seeing "green shoots" in pet adoption trends for the first time since 2021, which could signal a potential rebound in new pet ownership.
Piper Sandler's pet survey also suggests a continued strong interest in new pets, which could be beneficial for Chewy.
Overall, while top-line growth remains a concern, Piper Sandler's upgrade reflects confidence in Chewy's ability to achieve greater profitability through improved margins and operational efficiencies.