Investing.com -- Mizuho analysts have downgraded Chewy (NYSE:CHWY) to Neutral, removing its "Top Pick" status, stating that the "current set-up into and post Q1 results is increasingly less attractive."
The downgrade comes after a significant 55% rally in shares since April lows, outpacing the S&P 500’s 20% gain.
Mizuho believes that while Chewy’s "customer and revenue growth trends have strengthened," these improvements are "well-known at this point and fully embedded in expectations."
The firm said it is a "positioning call," noting "several potential landmines for Q1" results, which are due on Wednesday, June 11.
These risks include an "optimistic stance towards guidance and elevated margin expectations." Mizuho added that they would "not be putting new money to work at these levels and with shares >22x forward EV/EBITDA."
The analysts are still modeling for Q1 upside, with their forecast of 8-9% revenue growth surpassing management’s guidance of 6-7%.
However, they believe the quarter will be judged on "the magnitude of upside and forward commentary on trends into June / guidance for Q2E and FY25E."
Mizuho also finds "consensus gross margin expectations seem somewhat mis-modeled and elevated," as Chewy laps a one-time benefit from the prior year’s Q1.
Furthermore, the firm points to several factors that would be necessary for shares to move higher in the near term, including significant net active customer gains, strengthening gross margin trends, and Q2 revenue growth acceleration.
They acknowledge they "may be early with this call, but overall see CHWY as having to check all of these boxes in order to push shares higher."