Chewy’s ‘defensive’ business could shine as pets need food in any economic climate, analyst says

In good and bad economic times, people need to buy pet food, and that’s one reason Chewy Inc.’s stock may be worth a makeover.

Needham analyst Anna Andreeva upgraded Chewy CHWY shares,
+0.31%
buy pending on Monday, writing that the stock looks like a way to play defense in the current market.

“The pet space is defensive (historically outperforms during recessions) and demand is inelastic (cost increases are passed on to consumers, especially in the staple consumable category),” she said. written in a note to customers.

Chewy’s stock rose 0.2% in Monday afternoon trading.

Chewy also has other factors working in her favor, according to Andreeva. After missing earnings before interest, tax, depreciation and amortization (EBITDA) consensus expectations for four straight quarters, Chewy ended the streak with a first-quarter beat, and Andreeva believes the company was able to to maintain this new momentum.

Not only are pet supplies “inelastic,” but she also sees signs of improving supply chain trends, as well as the success of Chewy’s own initiatives, such as automated fulfillment centers, aimed at to improve profitability.

See more: Chewy posts surprise earnings

While Chewy may be holding up in the current economic climate, fellow e-commerce company Etsy Inc. ETSY,
-4.21%
may be in a weaker position due to its focus on more discretionary items. Andreeva downgraded the stock to keep it long in a Monday note.

The stock fell about 4.2% in afternoon trading.

Meanwhile, the SPDR Consumer Discretionary Select Sector XLY exchange-traded fund,
-1.01%
fell 28.8% since the start of the year, while the S&P 500 SPX index,
-0.27%
lost 18.2%.

Andreeva acknowledged that Etsy is still in its early stages of getting newly acquired customers to make more repeat purchases on the platform, and noted that the success of these efforts could pay off for years.

“At the same time, in the near term, given the predominantly discretionary nature of underlying demand and current consumer pressures in the United States and globally, we believe the core of Etsy GMS [gross merchandise sales] could remain under pressure, while new submarines also experience negative demand trends, with profitability holding back consolidated results,” she wrote.

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